Nicolai Tangen, the CEO of the world’s largest wealth fund, Norges Bank Investment Management (NBIM), has sounded an alarm about the potential implications of a commodities rally on the inflation outlook.
Tangen, speaking on LA News Center’s “Squawk Box Europe,” pointed to the rapid surge in energy and raw material prices as a potential headache for central banks struggling to contain inflation. As of Tuesday afternoon, the S&P GSCI, a global commodities index, had skyrocketed 9% since the year’s beginning, eclipsing the benchmark S&P 500 index.
“The big worry is just what that could mean for inflation, right?” Tangen said. “If energy and raw material prices continue to move up, that is going to feed through to end-product prices, which are going to be higher. And that could be the real wildcard when it comes to inflation expectations.”
The Commodities Conundrum
Tangen’s concerns stem from the impact of rising commodity prices on production costs and consumer spending. Oil and copper have soared by about 13% respectively year-to-date, while gold has repeatedly hit record highs. This surge can amplify inflationary pressures as businesses pass on higher costs to customers.
Fewer Rate Cuts in Sight
The prospect of persistent commodity-driven inflation has caused economists to re-evaluate the pace of central bank interest rate cuts. Last week, European Central Bank President Christine Lagarde hinted at the ECB’s awareness of commodity prices and the need for caution. While acknowledging the likelihood of a rate cut in the absence of major shocks, she emphasized the bank’s close monitoring of commodity price movements.
Meanwhile, with U.S. inflation remaining stubbornly high, traders are now pricing in a low probability (13%) of a rate cut in June, a significant drop from the nearly 70% likelihood projected last month.
Tangen’s Perspective
Tangen believes that central banks will face an uphill battle in bringing inflation down to target levels. He attributes this to a confluence of factors, including geopolitical tensions, supply chain disruptions, climate change, and rising wage inflation.
“We are expecting fewer rate cuts than the market did earlier in the year,” Tangen said. “My surprise is that the market has taken it so well. I would have expected the market to have reacted more negatively to this postponement of interest rate cuts.”
As the world navigates the uncertainties of a commodities rally and the persistence of inflation, it remains to be seen how central banks will respond and what impact this will have on global financial markets.
