TIPs (Inflation protected US treasuries) “breakevens” are the most widely followed measure of inflation expectations. They appear to have peaked at 3.6% last March and have been declining since. Yet commodity prices have been dastardly elevated and making new highs (see chart comparing the 5 year breakeven for TIPs and the CRB index).

The divergence is puzzling as rising commodity prices would typically feed into higher inflation ahead. A plausible reason for the discrepancy is that markets are expecting a significant slowdown in the global economy and, therefore, reduced demand for commodities and lower prices. That was the case in the past and especially in 2008 when the 18 months recession cut into half the CRB index.

There are at least three reasons to believe this time commodity prices may remain elevated. First off, any recession ahead may be short as record levels of global debt will prompt policy makers to reflate and protect the economy from spiraling defaults. Furthermore the inevitable fiscal expansion in 2023 and 2024 will likely involve large investment into energy security and decarbonisation. Such an effort would require massive amounts of energy and industrial metals, hence will be supportive commodity prices. Last is geopolitics; the age of efficient and risk-free provision of energy and material is no more as deglobalization harbors protectionism and elevated sovereign risk.

Commodity prices had a major run up and may be due for some correction, yet cognizant investors need to realize that in the current macro environment, scarce real assets (vs “fiat” ones) will continue to be front and center. Disclosure: Hold all assets mentioned. Not investment advice. Do your own research.