Inflation and the 3 C’s

Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.

Inflation and the 3 C’s

Inflation is at the forefront of any conversation with investment managers. Is it transitory, with bottlenecks and shortages self-correcting as policy makers envisage? Or will faster than trend growth in the next decade force prices higher, compelling central banks to increase interest rates earlier than currently forecast? The latest update from the FOMC, bringing forward their estimated timeline for raising rates, has added fuel to this ongoing debate.

Given the controversy stirred by the more hawkish tone from the FOMC we thought it prudent to revisit some of the themes from our article 3 weeks ago entitled ‘A New Commodity Super Cycle’.

Three major commodities that have demonstrated significant growth this past year, Crude (oil), Copper and Corn have each impacted various areas of the global economy. The 3 C’s provide us with great examples of how rising prices in an inflationary environment can impact businesses and consumers.

Table 1: Crude Oil, Copper and Corn, Price and YTD%

Source: Bloomberg 01/07/2021

 Crude Oil:

Oil prices have rallied for the past year since the unprecedented dip in 2020 when WTI Crude was momentarily priced negatively. Today, Brent Crude is selling for over $75 a barrel and WTI Crude in the US only slightly lower at $74, but both pushing ever closer to the $100 per barrel mark; an increase of 47.9% and 54.5% year-to-date, respectively.
The Organisation of Petroleum Exporting Countries (OPEC) is an intergovernmental organisation, comprising 13 oil exporting countries. The purpose of OPEC is to coordinate oil production and ensure the stability of price and supply levels.
In 2016, OPEC formed an even larger agreement with additional non-member states called OPEC+. This expanded entity now includes Russia and Mexico and controls over half the global oil supply and around 90% of known oil reserves.
Analysts expect the OPEC+ meeting this week will likely result in a monthly boost of around 500,000 barrels per day over the next 6 months. Whether these measures are enough to meet the increased demand and stabilise prices, or even lower them, is yet to be seen. But what we do know is the price of oil influences the cost of multiple goods and services, ranging across manufacturing, food production and extending to travel and utilities. If prices get out of control in these sectors it impacts all corners of the market.

Chart 1: $ per Barrel of Crude Oil – YTD


Source: Bloomberg 01/07/2021 


Copper has increased by a substantial 20.6% year-to-date from $3.55/lb to $4.29/lb. The surge in demand for electric vehicles and semiconductors is providing a strong tailwind for copper prices. If it continues to increase it will push up the price of new cars and computer components globally.
Supply shortages have been identified as the primary driver by the Chinese agency, The National Food and Strategic Reserves Administration.  Following this, in June, the Chinese Government pledged to release government copper reserves to help increase supply and to combat the shortage that is creating a volatile spike in the price.

Metal producing countries have no agreements in place like OPEC, leaving it to individual countries like China to attempt to control prices and supply.

Chart 2: $ per Lb of Copper – YTD

Source: Bloomberg 01/07/2021


Corn is a huge contributor to the US economy. It creates over 165,000 jobs and provides an estimated $47billion of total economic output (est.2020). This versatile crop is used as animal feed, and has application in biofuel and plastics, plus a whole host of other uses. Even 3D printing inks require corn as a raw material input. This wide range of applications means price fluctuations traverse many differing sectors.
The price of a bushel of corn has more than doubled since September 2020, from $3.50 to $7.18. One big driver of this is China quadrupling their imports of US corn as animal food. Chinese farmers are currently trying to “fatten millions of hogs” to replace pigs that were culled due to a disease outbreak before the pandemic.
High prices represent good news for US corn farmers, but the US non-farm sector and US consumers will bear the brunt of inflation because of these strange market dynamics.

Chart 3: $ per Bushel of Corn – Sept 2020 to Date

Source: Bloomberg 01/07/2021


The 3 C’s are highly influential to the inflation setting. As yet, there are no indicators that any of the three major commodities are showing a marked slow down in growth.

Measures implemented over the past few weeks from the FOMC and OPEC+ demonstrate that some limited efforts are being made globally to control the inflationary environment. Meanwhile, consumer demand is increasing with economies all over the world reopening.

The consensus that inflation will be transitory remains intact, but there are voices outside this consensus that disagree with the prevailing central thesis. They suggest policymakers need to do more to ensure inflation expectations do not run ahead of central banks’.

Global Markets