Commodity prices will climb in 2025, adding inflationary pressure globally. That’s according to Ken Orchard, head of international fixed income at T. Rowe Price in London.
“If we go back to after the [global financial crisis], there were 10 years where we had disinflation across most of the world,” Orchard told reporters at a press briefing on Tuesday. “Today, we’re in a different regime, a different economy, where inflation has been driven as much by supply-side factors as demand-side factors.”
Commodity prices are well above pre-pandemic levels, due partly to structural changes, Orchard told Investment Executive via email.
“In oil, the productivity from shale is declining, he wrote. “The U.S. has depleted tier 1 inventory, and tier 2 requires higher oil prices to prosecute with the same returns.”
Orchard added that regulators have made it more difficult to open and expand copper mines, and he’s not seeing major capital spending yet. “It takes longer to build mines — partially because of the regulatory environment and partially because of hesitancy and uncertainty after a deep cyclical downturn. We haven’t seen a wave of new projects despite spreadsheet math that suggests we should have by now.”
Supply is “constricted,” he said during his presentation, “and that is putting upward pressure on inflation. In fact, we expect that process to continue next year.”
China will contribute to demand in the new year, too. After throttling down its efforts to stimulate the domestic economy in the years following the pandemic, Beijing is likely to put its foot back on the gas pedal in 2025.
“It does seem as if there has been a change in China,” said Orchard. “Policymakers are now seeking to put a floor underneath growth, so they are gradually introducing a little bit more stimulus … into the economy.”
T. Rowe Price expects Beijing to target something close to 5% growth in 2025, which the firm believes is higher than this year’s data will come in at. “We’re not expecting a big jump in Chinese growth next year, but that downward drag that we see in growth is probably going to end next year because of that extra Chinese stimulus.”
These inflationary pressures will present investors opportunities with inflation-linked bonds issued by the U.S., Japan, U.K. and other European countries.
“Inflation-linked bonds are very interesting from a longer-term perspective,” he said. “We expect that it’s going to take time for the market to fully price in this higher inflation path that we’re on … Gradually, we expect there to be a convergence between core inflation and market-priced inflation, but it’s going to take time. In the meantime, expect inflation-linked bonds, such as [Treasury inflation-protected securities], to outperform nominal bonds.”
Often referred to as TIPS, these Treasury bonds are designed to protect investors from inflation.