Is a commodity boom beginning?
Should persistent inflation drive a portfolio shift?
Helped by a 12 per cent rally since the war-inspired low recorded on March 30, the U.S. S&P 500 index is now at new all-time highs and more than two per cent above its previous all-time high recorded in February.
It’s reasonable to conclude the global and U.S. economies are healthy and booming, as is the AI rollout. But those booms, along with the shocks stemming from war in the Middle East, may be sowing the seeds of a pivot and an inflation threat that could have serious implications for portfolio construction.
Inflation
The latest U.S. consumer price index (CPI) report revealed the surge in energy prices, fueled by the ongoing conflict with Iran, has reignited inflation and inflationary fears that, at the start of the year, many had hoped were being extinguished.
While the overall index rose 0.9 per cent last month – the sharpest monthly spike since mid-2022 – petrol prices surged by a staggering 21 per cent, marking the largest monthly jump in nearly 60 years of record-keeping.
This single category accounted for nearly three-quarters of the total inflationary gain, pushing the annual CPI rate to 3.3 per cent in March, a notable acceleration from February’s 2.4 per cent and the highest level seen since May 2024.
Historically, energy shocks are rarely contained within a single month’s petrol bill. You might recall, Russia’s invasion of Ukraine in 2022 eventually bled into higher airfares and grocery bills, so it seems likely the current effective closure (again) of the Strait of Hormuz will likewise ripple beyond the petrol stations and throughout global supply chains.
Indeed, and anecdotally, the price of a takeaway chicken teriyaki meal from the local IGA jumped 17 per cent from $5.99 to $6.99 this week.
Airlines, which are already raising fares and cancelling flights, are expected to continue hiking prices as they pass on soaring jet fuel costs. Meanwhile, farmers and manufacturers have issued urgent warnings about shortages of key fertilisers due to blocked transit routes, suggesting the worst of grocery and supermarket inflation is likely still ahead.
Bonds
If it hasn’t already, this resurgence of inflation will cause consumers to reprioritise their spending. Public transport, for example, is enjoying record patronage as drivers forego the car, especially for travel to and from work.
U.S. consumer confidence plunged to a record low of 47.6 in April, according to the University of Michigan, as one-year inflation expectations jumped to 4.8 per cent. Unlike the post-pandemic era, where households were flush with stimulus, today’s consumers have endured five years of rapid price increases and are showing signs of exhaustion.
But while consumers are already changing behaviour, I wonder whether investors have more work to do. Has, for example, the outlook for fixed-income markets fundamentally altered, and in so doing, revitalised the once-dormant bond vigilantes?
U.S. researcher Ed Yardeni believes a significant pivot in the inflation outlook has taken place, shifting his firm’s focus toward a “higher-for-longer” interest rate environment. Yardeni believes the negative oil-supply shock has dashed hopes of subdued inflation. Consequently, global yield curves are being repriced. The 10-year Treasury yield, previously projected to hover around 4.50 per cent, is now under pressure to exceed that level, amid a growing realisation the Federal Reserve’s anticipated rate cuts for early 2026 are likely off the table. There are even some market analysts now pricing in rate hikes rather than relief.
Bigger picture
The deflationary tailwinds of the last thirty years, powered by cheap manufacturing and global supply chains, are unwinding if they haven’t completely stopped. And in their place is a structurally tight labour market (thanks to an aging population) and expensive local production.
This reality forces central banks into an impossible corner. With a U.S. debt-to-Gross Domestic Product (GDP) ratio nearing 125 per cent, the U.S. government faces competing needs. High debt requires low rates to remain serviceable, but high inflation demands high rates to be tamed. The historical path of least resistance in such a dilemma is ‘financial repression’ – allowing inflation to run hotter than the target to erode the real value of nominal debt.
This might not be good for stocks sensitive to inflation and higher-for-longer bond rates.
And I wonder to what extent the political signals out of the U.S. are beginning to align with this macroeconomic reality. On the same day the 3.3 per cent CPI print was released, President Trump posted a cryptic message on Truth Social: “WORLD’S MOST POWERFUL RESET!!!” Could he mean a deliberate shift toward a commodity-intensive, higher-inflation economic model where the rules of portfolio construction have to change?
For decades, multilateral bodies, including the World Bank and the IMF, have directed their lending power toward ending poverty and, more recently, addressing climate change. But recently, U.S. Treasury Secretary Scott Bessent explicitly directed global lenders to abandon their “myopic focus” on arbitrary climate targets and target funding of critical mineral mining projects.
Portfolio construction
If inflation is here to stay, it means the traditional 60/40 portfolio may not serve investors well. The current equity market highs and rapid reversals of heavily sold technology sectors may create the illusion of stability and good times for traditional portfolios. But underlying the optimism and strength are subtle pivots towards materials and hard assets.
By way of example, mining billionaire Robert Friedland is warning of a massive, impending copper supply squeeze, arguing that artificial intelligence (AI), electric vehicles (EVs), and green energy – particularly EV motors and dense AI server racks, where there isn’t room for bulky aluminium wiring – will require immense increases in copper mining.
And historically, there’s merit in the idea of a materials boom following a tech boom.
Economic historians often describe this as the transition from the Installation Period to the Deployment Period. It’s a concept popularised by economist Carlota Perez.
When a speculative boom occurs around a new technology (like the Steam Engine, the Internet, or now AI), the focus is initially on the intellectual property and the ‘rails.’ Once those rails are built, however, the world enters a period of deployment that requires massive physical inputs.
The Electrification Era between the 1890s and the 1920s gave rise to General Electric and Westinghouse, as well as a massive rush into electrical utility stocks. But as cities actually began to be wired up, the demand for copper skyrocketed. Indeed, copper went from being a minor industrial metal to a strategic global commodity. This period also saw the birth of the massive open-pit mining industry to meet the materials tail of the electricity boom.
More recently, the Dot-com bubble was initially focused on software, websites, and fibre-optic ‘lit’ capacity. And while the subsequent tech crash in 2000 was painful, the infrastructure laid the groundwork for the Commodities Supercycle of 2002–2011.
The digital revolution enabled manufacturing that required unprecedented amounts of iron ore, copper, and metallurgical coal to build the physical hardware, the cities, roads and data centres that put the internet in everyone’s hands.
There’s a lag between the ideas boom (think AI, EVs, Software) and the subsequent boom in commodities because even as society realises physical goods are needed to make the idea work at scale, mining is slow. While it may only take six months to build a data centre, a new copper mine can take 10-15 years to become productive, ensuing a shortage of the commodities that causes their prices to rise.
And when the tech (in this case AI) becomes essential to the economy, the demand for the materials becomes inelastic. The world will pay whatever it takes to get the copper or lithium needed to keep the system running.
In terms of portfolio construction, the equity portion of your portfolio may need to consider its weighting to commodities.
Even if Yardeni is wrong on inflation, the commodity boom may continue. Interestingly, data from early 2026 shows that while broad CPI stabilised, the Bloomberg Commodity Index rose 16.7 per cent year-over-year through February, suggesting that even if official inflation looks tame, specific materials like copper can still boom due to expected structural deficits.
Finally, it’s worth keeping in mind that during periods of high CPI, the “real” (inflation-adjusted) return of traditional bonds often turns negative. Commodities are historically one of the few assets that maintain or grow purchasing power because their nominal price rises in tandem with – or faster than – the cost of living.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
He is also author of best-selling investment guide-book for the stock market, Value.able – how to value the best stocks and buy them for less than they are worth.
Roger appears regularly on television and radio, and in the press, including ABC radio and TV, The Australian and Ausbiz. View upcoming media appearances.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
