When the pandemic hit America in 2020, we quickly realized that the economy was in grave danger of collapsing. The Federal Reserve successfully intervened by providing an unprecedented amount of financial aid. While it was necessary to keep the economy humming amid global shutdowns, the money they “created” came at a cost, in the form of inflation.

Initially, inflation wasn’t a major concern. This is largely because inflation isn’t necessarily caused by the total amount of money in the system, but by the velocity or turnover over of the money supply. With national shutdowns, record high unemployment, and travel restrictions, the money injected into the economy wasn’t given the chance to “turnover.” That is, until COVID restrictions began easing, and life started to return to normal. Now, restriction-weary Americans are returning to work, reopening businesses, attending events, and swiping their credit cards with gusto during a time when supply chains are still recovering from pandemic-induced low inventory levels. Other factors, including rising labor costs, shipping disruptions and general abuse of the current situation dramatically increased the cost of goods and services.

Economists did not have to wait for the Superbowl to see something exciting – the main event arrived February 10th with confirmation from the US Bureau of Labor Statistics that the Consumer Price Index (CPI) was up 7.5% for the 12 months ending January 2022 - the highest since February 1982. As our country’s monetary authority, the Federal Reserve is responsible for keeping inflation within permissible limits, and after the recent inflationary data, most would argue they are not doing a very good job. Despite widespread call to immediate action, Fed officials made it clear that while they are poised to begin lifting rates in March and not before, the initial increase may be smaller than what investors expect. The Fed is also planning to purchase an additional $30 billion in US treasuries and mortgage-backed securities. The Fed’s "easy money" policies are undoubtedly contributing to inflation.

With unemployed at 4% and dramatically reduced COVID restrictions, it seems as though the next logical step is to scale back on the policies contributing to inflation and restore integrity to the purchasing power of the US Dollar (not the US dollar index).

So, how will the inevitable shift from easy money policies affect commodities prices? Historically, there is an inverse relationship between commodity prices and interest rates: when interest rates increase, commodity prices decrease and vice versa. This is largely because when rates increase the cost of carry, inventories rise, and consumers tend to buy raw materials on an as-needed basis rather than stockpiling due to the higher cost of financing. However, there is no guarantee this occurs; the commodity market’s reaction will vary and be heavily dependent upon whether prices rise because of inflationary pressures, or underlying supply and demand fundamentals.

The relationship between US interest rates and the US dollar further complicates the outlook. Typically, less accommodative monetary policy eventually causes a higher yield for dollars compared to other currencies in the world; this leads to dollar appreciation. As the world’s reserve currency and the benchmark pricing mechanism for most commodities, US dollar appreciation can cause the price of many commodities to trade lower, particularly goods like cotton that are widely traded on the global market.



Interest rates currently remain at historically low levels and the US dollar index is trading sideways in the middle of previous two years trading range. Posting a close above the January high of 97.30 (green arrow) may lead to an upside breakout, which could weigh on commodity prices.