The excitement seems to be coming out of the commodities space judging by share prices in miners and oil and gas companies.

This suggests inflation could soon ease and/or investors are taking profits in stocks that have done well this year. Both factors imply a potential rotation into other parts of the market, which is something to watch in the coming weeks.

Miners and oil producers started the year in full force. Investors flocked to commodity producers in the hope they would benefit from inflation. Commodities such as oil and metals typically rise in value when inflation is accelerating.

The higher cost of making goods is often passed on to consumers, and that’s why we’ve seen inflation hit household finances hard this year.

Russia’s invasion of Ukraine exacerbated the rise in commodity prices as sanctions on the country disrupted its supply of energy and metal products. However, that driver has lost momentum of late.

Shares in diversified miner Rio Tinto (RIO) jumped by 42% in value between November 2021 and April 2022. While briefly dipping in May, by June they were nearly back to 12-month highs at £60.91. Since then, the shares have fallen by 22%.

Anglo American (AAL) has followed a similar trend with a share price rise between November and April, a blip in May, and then a 33% decline from its June peak.

These share price movements shouldn’t have been a surprise given the big miners are highly leveraged to commodity price movements. Copper is trading 20% below its June peak while oil is down 15% over the same period.

Both declines are linked to market concerns about a global economic slowdown. At the same time, major commodities user China is still battling the pandemic and its zero-Covid policy threatens to disrupt economic activity in the country.

The fact commodity prices have weakened also explains why the natural resources-heavy FTSE 100 index of UK shares has pulled back since June. Over the past month and a half there has been a ‘risk-off’ mentality with defensive stocks across healthcare, telecoms, pharma and insurance being the best performers.

Investment bank Liberum believes the commodity sell-off can be traced back to 22 April which is when Fed chair Jerome Powell called for an accelerated rate hike cycle. It says: ‘2020-22 was never a “Super Cycle”. It was a stimulus-fuelled reflation trade, intended to get us all out of lockdown. The Fed’s now terminating the event.’

It will take time for lower commodity prices to work their work through the system, so don’t expect to see inflationary pressures ease in the near-term. However, what’s happening does provide some encouragement that the high cost of living may only be temporary.

There are other signs to watch. For example, many companies are sitting on too much stock so they may slash prices to move goods. Consumers cutting back on spending also effectively puts a lid on price hikes. These play to the phrase, ‘The cure for high prices is high prices.’

The wheels are certainly in motion for inflation to ease, but how long it will take to play out is another matter.

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