How will potential trends in inflation, the US dollar and supply deficits across many raw material markets affect the environment for investing in commodities?
Once considered the realm of only the most courageous investors, commodity allocations have gained in popularity following the great inflation outbreak of 2022. That year, the Bloomberg Commodity Index rallied over 16%, while stocks in the S&P 500® Index and bonds in the Bloomberg US Aggregate Index both declined. With inflation declining in the two years since then, however, stocks have rebounded, while commodities and bonds have managed only small gains.
For commodity investors wondering what 2025 may bring for the asset class, let’s look closely at three areas to watch:
Inflation stickiness
US inflation has proved to be much stickier than expected. On a year-over-year basis, the December Consumer Price Index (CPI) reading was 2.9%, while Core CPI, which strips out the volatile energy and food components, was worse still at 3.2%. That may be a big improvement over nearly double-digit price rises a couple of years ago, but inflation getting stuck near 3% is a far cry from getting back to 2%.
For much of 2024, many projections suggested that inflation would continue to fall. Take the US Federal Reserve’s Summary of Economic Projections, which plots where each board member and Fed bank president thinks inflation will go. Last September, almost all Fed monetary policymakers had thought that headline Personal Consumption Expenditures (PCE) inflation would fall to no more than 2.2% in 2025, before receding to the target 2.0% quickly thereafter. Only a few months later in December, many of those same officials thought that inflation would likely end this year around 2.6%.
Other economists seem to have found themselves in this about-face following the US Presidential election in November. And they aren’t alone: Recent survey data from the University of Michigan pins consumers’ expectation for inflation at 3.3% for the next year, up from 2.8% just a month prior.
We can speculate that policy plans from the new administration may be driving inflation expectations up. Three areas have caused some concern: tariffs, the government budget deficit and immigration. In our opinion, all three have the potential to create higher inflation in the coming years if promises made on the campaign trail are kept.
Without getting into the specific inflation-causing details, we would simply point out that if inflation does come in hotter, commodities may stand to benefit. Looking historically from 1960 to today, the average 12-month return for the Bloomberg Commodity Index has been about 20% better when year-over-year inflation comes in above 2% (+15%) rather than below 2% (5%).
US dollar robustness
As commodity investors, we’re also watching the US dollar. Although every commodity has its own distinct characteristics and price drivers, investors have time and again recognized a common link between the greenback and commodity prices. An inverse relationship typically exists between these assets, where a fall in the value of the US dollar tends to be associated with a rise in commodity prices, and vice versa.
The root cause of this inverse relationship is open to debate. Among several plausible arguments, one states that the dollar’s value tends to impact commodity prices because the US dollar is the most common pricing and settlement currency for commodities. When the dollar appreciates against other currencies, commodities become more expensive on the world stage, which can depress overall demand. As consumption falls, so do prices. If we flip this dynamic on its head, we can see that a fall in the greenback might boost demand, stirring prices higher.
Since bottoming in late September, the Bloomberg Dollar Index, which tracks the dollar’s value against a basket of 10 other leading global currencies, has rallied roughly 8% as of mid-January. This might be due to longer-term US interest rates moving higher over the period—for instance, the 10-year Treasury yield is up almost a full percentage point. And higher US rates often attract capital inflows from foreign investors, which can drive up the value of the dollar.
Another plausible story is that part of the dollar rally results from the tariffs proposed by President Trump. The thinking goes that putting a tariff on an imported good from, say, China raises its dollar price within the US. Therefore China’s currency should fall versus the dollar to offset this.
No matter what the exact driver of the dollar’s recent strength, we think it’s worth noting that commodity performance has likely suffered as a result. And though the dollar could go on to rally from here, we suspect it’s also possible that some headwinds could start to emerge. Even if the dollar were to trade sideways, a significant hurdle to commodity performance would potentially be removed from the market.
Physical market tightness
Back in the summer of ‘22, we pointed out that commodity futures markets had moved significantly into backwardation—a phenomenon where spot prices trade at a substantial premium to futures prices—due to supply deficits across many markets. The opposite state is referred to as contango, where spot prices trade below futures prices.
Today, these effects seem to have dissipated. Commodity markets overall appear to be trading with a slight degree of contango. As of December 31, spot prices were trading at an average discount of roughly -0.6% to commodity futures positions that mature in approximately a year.
A market in contango would suggest that near-term supplies of a commodity are sufficient to meet current demand. Typically observed during periods of surplus inventory in physical raw materials, contango often unfairly carries a negative connotation related to the investment prospects of the asset class.
However, we think it’s worth remembering that interest rates play an important role in setting futures prices. Under normal market conditions, futures prices are higher than spot prices because they incorporate costs that a seller would incur for buying and financing the commodity. Said another way, interest rates contribute to the steepness of the futures curve. As interest rates rise, futures prices appear more expensive relative to spot prices—the futures curve steepens. That means the degree of contango in commodity futures has increased with the increase in rates, which can potentially mask what’s going on in the physical market.
To strip out the impact of rising yields and get a better sense of the underlying inventory conditions, we can adjust the futures curve by adding back an equivalent Treasury yield. After this adjustment, we find that the average level of backwardation as of year-end was around 4% (instead of -0.6%). This is high from a historical perspective, implying that inventories remain relatively tight across many commodities.
For commodity investors, the level of inventories can have a big impact on prices. Undersupplied markets tend to be more vulnerable to demand shocks, which may drive prices higher. Our research suggests that historically, periods of physical market scarcity like we see today have generally been associated with better commodity performance on average.
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The bottom line
For commodity investors, three areas to watch this year include inflation, the US dollar and supply conditions across physical markets.
- Inflation, which fell quickly at first, appears to have stalled out near 3%. Higher inflation and better commodity performance have often gone hand-in-hand.
- The US dollar, which has been strong in anticipation of higher rates and new policies from the Trump administration, may face challenges to further growth. A dollar that falls from here may support commodity performance. Even a sideways dollar would remove a recent headwind.
- And physical commodity markets, which have been undersupplied for well over two years, remain tight entering 2025. Historically, when supply has been insufficient to meet current demand, commodity returns have often been higher.
The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.
02.13.2026 | RO 4196310
