Inflation hit a 30-year high, with rising energy, goods and food prices pushing it to 6.2 per cent in the 12 months to February, according to the Office for National Statistics.
The Bank of England, which recently raised interest rates to 0.75 per cent, has forecast inflation will soon hit eight per cent, with further increases later in the year sending it towards 10 per cent and possibly beyond.
Russia going to war with Ukraine is the greatest driver, with prices higher in virtually every commodity – oil, metals and food.
However, it is by no means the only one.
Philip Matthews, portfolio manager for TB Wise Multi-Asset Income, told FT Adviser: “Covid remains a real economic threat and deflationary forces in existence pre-Covid, such as demographics, high levels of debt and technology, have not gone away.”
For the investor, commodities offer greater protection than growth assets during inflationary periods.
And this may not be a one-off but part of a longer term trend as precious metals become increasingly in demand with the rising popularity of electric cars.
Matt Scott, senior strategic research specialist at investment giant Mercer, noted: “Rising inflation levels have had everyone asking whether the trend is transitory or something more structural?
“The transition to a sustainable future is expected to lead to huge increases in demand for lithium, nickel, cobalt, manganese and graphite (batteries); rare earth elements (wind turbines and electric motors); copper, silicon and silver (solar panels); copper and aluminium (grid).”
Investment managers Pimco stated: “Because commodity prices usually rise when inflation is accelerating, investing in commodities may provide portfolios with a hedge.
“In contrast, stocks and bonds tend to perform better when the rate of inflation is stable or slowing. Faster inflation lowers the value of future cash flows paid by stocks and bonds because that future cash will be able to buy fewer goods and services than they would today. For these reasons, returns from a broad and diversified commodity index such as the Bloomberg Commodity Index, Credit Suisse Commodities Benchmark or the S&P Goldman Sachs Commodity Index, have historically been largely independent of stock and bond returns, but positively correlated with inflation.”
Writing in Investors Chronicle, former City fund manager John Rosier highlighted how we are in “difficult times” as a result of war and sanctions.
He went on: “The pain inflicted on the Russian economy will be huge. There will also be a price to pay in the West.
“Higher raw material prices will feed through to general inflation and act as a tax on consumption. Forecasts for economic growth are likely to be reduced.
“As far as markets were concerned, equities were not the place to be in February. The Dax was off 6.5 per cent, closely followed by other Continental European markets. The S&P 500 lost 3.1 per cent in the US and the Nasdaq 3.4 per cent. The high exposure of the FTSE All-Share to mining stocks helped it limit its fall to just 0.5 per cent.
“Commodities performed well with nickel up 10.2 per cent, rhodium 7.1 per cent, copper 4.2 per cent, platinum 3.3 per cent and zinc 1.7 per cent. Brent crude was up 9.9 per cent, ending the month just short of $100 per barrel and its highest since 2014. It then spiked to $130 per barrel in early March.
“The gold price was up 5.8 per cent, but at $1920 per ounce, it is still some eight per cent below its August 2020 high of $2075.”
The message is that a well-diversified portfolio includes commodities – speak with your financial adviser if you have concerns.