Correlation on Copper Price and US Inflation

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Correlation on Copper Price and US Inflation

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Envision a mythological demon with a unique ability: the moment you defeat it and experience satisfaction from its demise, the demon is reborn. Your sense of accomplishment in “vanquishing the demon” actually causes its resurrection. The question is, how would you eliminate such a demon?

Inflation in current environment of abundant money supply can be likened to such a mythological demon. The moment it seems that inflation is receding, the markets breathe a sigh of relief and begin to climb, leading to a rise in commodity prices. Ironically, this very increase in prices contributes to the resurgence of inflation, creating a self-perpetuating cycle.

The chart below, which illustrates the relationship between copper prices and the US CPI inflation, demonstrates a significant correlation over the past decade, with a correlation coefficient of 70%+. This suggests that copper prices and inflation tend to move in the same direction. As inflation begins to subside, we can observe an increase in copper prices. After the Fed’s signal that a Pause in hike is likely, copper prices shot up by over 1.5% in matter of hours. This in addition to the increase in prices for last 6 months.

The expected slide in SOFR will need to shift a bit in the right is what we think along with all associated market impacts.

 

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