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Graphic: Commodities to the rescue

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Commodities have been a bright spot this year, easily outpacing other asset classes that have been dinged by rising interest rates and growing fears of recession. Beyond short-term performance, the recent bout of inflation serves as a reminder of how commodities can play an important role in hedging against that risk over the long term.

Rising prices: Commodity prices are up sharply this year amid supply chain problems and the war in Ukraine. Year to date through June 2, the Bloomberg Commodity index has increased by 35%.

Bloomberg Commodity index

Lonely at the top: Since the start of 2022, the Bloomberg Commodity Total Return index has returned 35.3%, while equity and bond markets have been in negative territory. The two worst performers are the MSCI Emerging Markets index, down 13%, and the Russell 3000 index, losing 12.8%.

Quarterly index returns

Inflation hedge: Since 1990, the correlation between inflation, measured by the consumer price index, and commodity returns is 0.63. By contrast, the correlation between the Russell 3000 index and the CPI was 0.09 over that span.

Inflation and commodity returns

Diversification benefits: Since 1990, the correlation between commodity returns and most other asset classes was between 0.21 and 0.37. There was a -0.03 correlation with the Bloomberg U.S. Aggregate Bond index.

Correlations with Bloomberg Commodity Total Return index*

Russell 3000 index 0.21
MSCI World ex-U.S. index 0.34
MSCI Emerging Markets index 0.37
Bloomberg U.S. Aggregate index -0.03
Bloomberg U.S. High Yield index 0.23

*Correlation of annual returns starting in January 1990. Sources: Bloomberg LP, U.S. Bureau of Labor Statistics, Federal Reserve Economic Data

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