Global Real Assets

A bi-weekly discussion of the recent commodity, REIT, and real asset markets and what it may mean for investors.

January 12, 2017

John LaForge, Head of Real Asset Strategy

Can Inflation Rise Without Commodities?

  • We believe that the U.S. can see higher inflation rates in 2017, even if commodity prices do not rally.

What it may mean for investors

  • We remain tactically underweight on Commodities as an asset class, as we suspect that prices will generally flatline in 2017.

Last month, we released our 2017 Outlook—Seeing Things Differently report. In it, we discussed two themes upon which we would like to expand: 1) that we believe inflation in 2017 may be higher than what we have witnessed in recent years, and 2) that the 2016 commodity-price rally likely will stall in 2017.

These two themes beg the question– can the U.S. economy see higher inflation rates in 2017 if commodity prices don’t move higher too? The answer is yes—the U.S. can see higher inflation rates, even if commodity prices flatten in 2017. Our reasoning is that, over the past 50 years, commodity prices have slowly been losing their influence over headline inflation rates. This can be seen in Chart 1. The green line in the top clip represents commodity prices, back to the year 1914; the red line represents year-to-year headline inflation rates highlighted by the Consumer Price Index (CPI). The bottom clip shows rolling correlations between the two. Notice that the connection between commodity prices and inflation rates has steadily diminished, since 1960. The bottom line is that 2017’s inflation level can be higher than what we have seen in recent years, even if commodity prices don’t rise too.

Why are commodity prices not steering U.S. inflation rates like they once did? We believe the answer is that commodity prices have slowly been squeezed out as the dominant inflation driver, by “other” macro factors. Some of the “other” factors include: 1) the rise of globalization, 2) steadily mounting debt levels, 3) aging demographics, and 4) shrinking interest rates. Importantly, these “other” factors have largely contributed to overall disinflation (slower inflation rates), blunting the impact of higher commodity prices.

Chart 1. Consumer Price Index (CPI) versus CommoditiesChart 1. Consumer Price Index (CPI) versus CommoditiesSource: Bloomberg, Bureau of Labor Statistics (BLS), Wells Fargo Investment Institute. Monthly Data: 1/31/1914 - 11/30/2016. Top Clip right axis shown in log scale. Commodity Composite constructed using Prices by Warren and Pearson, BLS PPI, NBER Index of Spot Market Prices of 22 Commodities, Thomson Reuters Commodity Index.

Risk Factors

Investing in commodities is not suitable for all investors. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.


Commodity Composite Index Measures a basket of commodity prices as well as inflation. It blends the historical commodity index introduced by George F. Warren & Frank A. Pearson, former academics at Cornell, collected and published commodity price data in their book, Prices, and the producer price index for commodities (PPI-Commodities), and the National Bureau of Economic Research (NBER) Index of Spot Market Prices of 22 Commodities and the Reuters Continuous Commodity Index. The index components and weightings, from Warren and Pearson’s Prices, change over time but the 11 commodity groups used from 1786-1932 are: Farm Products, Foods, Hides and Leather products, Textile Products, Fuel and Lighting, Metals and Metal Products, Building Materials, Chemicals and drugs, Spirits (stopped tracking 1890), House furnishing Goods, and Miscellaneous. The PPI-Commodities is compiled by the Bureau of Labor Statistics and shows the average price change from the previous month for commodities such as energy, coal, crude oil and the steel scrap. The NBER Index of Spot Market Prices of 22 Commodities is a measure of price movements of 22 sensitive basic commodities whose markets are presumed to be among the first to be influenced by changes in economic conditions. The Reuters Continuous Commodity Index comprises 17 commodity futures that are continuously rebalanced: cocoa, coffee, copper, corn, cotton, crude oil, gold, heating oil, live cattle, Live hogs, natural gas, orange juice, platinum, silver, soybeans, sugar no. 11, and wheat.

The Commodity Composite connects the aforementioned components at the following years:

Warren and Pearson- Prices: 1720-1932, BLS PPI-Commodities: 1933-1946, NBER: 1946-1956, Reuters Continuous Commodity Index: 1956-Current

The U.S. Consumer Confidence Index (CCI) is designed to measure consumer confidence which is defined as the degree of optimism on the state of the economy that consumers are expressing through their activities of savings and spending. Global consumer confidence is not measured.

Global Investment Strategy (“GIS”) is a division of Wells Fargo Investment Institute, Inc. (“WFII”). WFII is a registered investment adviser and wholly-owned subsidiary of Wells Fargo & Company and provides investment advice to Wells Fargo Bank, N.A., Wells Fargo Advisors and other Wells Fargo affiliates. Wells Fargo Bank, N.A. is a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by the GIS division of WFII. Opinions represent GIS’ opinion as of the date of this report and are for general informational purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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Additional information is available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

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