Commodities in a Low Inflation Environment

Economies around the globe are experiencing disinflation, and even deflation, and the market expects inflation levels to stay depressed for some time. A significant driver of this disinflationary regime has been the severe decline in the price of oil. So, if inflation is low, and expected to stay low, and oil has hammered commodity portfolios, do commodities still fulfill their role as an inflation hedge? This is a reasonable question, but also one which requires further thought. The case for commodities can be deconstructed into the following overarching themes:

  • Disinflation and even deflation has been occurring around the globe, but it is important to remember that inflation levels can be volatile and can change very quickly
  • Over the medium to long term, commodities have acted as an excellent inflation hedge
  • The market expects inflation levels to stay low, but the market’s track record of estimating inflation has been poor

We believe it is still necessary to hold inflation hedging assets in portfolios, and that commodities continue to be an excellent choice for fulfilling this role.