Commodity prices diverging: energy vs the rest
Last month we commented that while the CPI readings remain very high, there are signs of moderation in commodity prices. With commodity prices remaining center stage as a macro driver, we continue to closely watch the various commodity indices, including the S&P GSCI index and its subcomponents.
There now seems to be a greater divergence between energy prices and other commodities.
The chart below shows the S&P GSCI Commodity Index (top section) along with its component indices over the last three years.
A closer look at gasoline and oil prices
Gasoline prices remain in the headlines, and leave an impression every time a driver fills their tank as prices hit new highs.
Oil prices are a global issue, with OPEC and the US being the biggest producing regions. Producers face mixed incentives about increasing production longer-term, including messages from the futures markets.
Gasoline and diesel refiners face reduced capacity, leaving them struggling to meet even historically normal levels of demand despite high potential profit margins.
Inflation is high but could ease as the year goes on
Inflation remains a big topic among investors, and the charts below clearly show some of the reasons why, but there are also reasons to suspect inflation pressure could ease later this year.
Inflation is high . . .
A barrage of recent headlines has made it hard not to notice that reported inflation is very high (e.g. US CPI year-on-year change at 8.5%). More importantly for markets, inflation has continued to come in above expectations. The Citigroup Inflation Surprise indices (chart below) measure the degree to which inflation reports come in above or below consensus expectations. The indices for the US, Europe, Emerging Markets, and the global aggregate are all still extremely high relative to historical norms. Europe is by far the most extreme, as it is affected most directly by the war in Ukraine and the resulting impacts on energy prices and many other commodities.