We expect tariff policy to remain a key part of the narrative pushed by the administration. Although trade deals may be made, we anticipate the effective tariff rate paid by US consumers to end the year significantly higher than just 12 months ago, which should keep inflation elevated and may continue to support the commodity asset class.
What did we see in the first half of 2025?
Commodity prices broadly had a solid start to the year. As of mid-June, the Bloomberg Commodity Index was up 10.9%, compared to only modest gains in stocks and bonds. For instance, the S&P 500 and Bloomberg US Aggregate Indexes have risen 2.3% and 2.9%, respectively, through June 18.
Part of the dispersion in asset returns may come down to uncertainty surrounding US tariff policy. All else equal, higher tariffs should push up prices—most obviously for imported goods—and weigh on economic growth. This type of environment tends to favor commodities with their well-established sensitivity to inflation.
The main risk to this view is a considerable slowdown in gross domestic product (GDP) growth. So far, though, US economic activity has continued to expand at a solid pace.
How do tariffs affect expected and realized inflation?
On inflation, tariffs pose a significant danger to consumer prices and future expectations. Even with the current 90-day pause in place on “reciprocal” tariffs, which was set to expire in early July, the effective tariff rate sits at approximately 22%, according to data as of May 23 from the Yale University Budget Lab.1 Only a few months ago, the rate was barely above 2%.
Before long, these costs could start to seep into lots of things consumers are fond of purchasing, driving up the inflation rate. And although we haven’t seen a pickup in inflation from tariffs so far, many economists and market participants think it’s just a matter of time.
Take the US Federal Reserve, for instance. In their June Summary of Economic Projections, which plots where each board member and Fed bank president thinks inflation will go, the median estimate for headline Personal Consumption Expenditures (PCE) inflation at the end of 2025 was 3.0%. Last September, almost all Fed monetary policymakers thought that PCE inflation would fall to no more than 2.1% this year, before receding to the target 2.0% quickly thereafter.
And they aren’t alone: Recent survey data from the University of Michigan suggests that consumers’ expectation for year-ahead inflation is even more unanchored at 5.1%—a massive jump from their 2024 year-end estimate of 2.8%.
To us, it appears that the impact and uncertainty from current tariff policy is having a substantial influence on inflation expectations. If consumers adjust their current buying patterns to get ahead of future price hikes, or if producers increase prices in response to higher input costs, that can subsequently drive up realized inflation.
This raises the risk that inflation remains above the Fed’s 2% target for a longer period, which would be supportive to commodities. Looking historically from 1960 to today, the average 12-month return for the Bloomberg Commodity Index has been about 20% better when year-over-year inflation comes in above 2% (+15%) rather than below 2% (-5%).
What could be the impact on global growth?
As commodity investors, we’re also watching developments in global growth expectations, more closely in the US and China. Given that commodities are produced and consumed on a global scale, a pickup or slowdown in the aggregate prospects for economies will likely influence raw material markets.
Recently, the OECD published a midyear report revising its economic forecasts,2 recognizing that risks to economic growth have increased. While the global economy had remained resilient, recent trends were worrying—including a stark increase in trade barriers, weakening business and consumer sentiment, tighter financial conditions and a rise in economic policy uncertainty. Among the notable revisions to growth projections, the OECD:
- Lowered its projections for 2025 and 2026 global GDP growth to 2.9%, from 3.3% at year end.
- Lowered its forecast of US economic growth to 1.6% in 2025 and 1.5% in 2026, revising downward its previous forecasts of 2.4% and 2.1%, respectively.
- Left its forecast for 2025 Chinese GDP growth unchanged at 4.7%, but lowered its forecast for 2026 growth to 4.3%.
Perhaps the most important takeaway was the OECD’s warning that significant changes had occurred in trade policies. If continued, these would hit global growth and cause rising inflation.
Falling economic activity poses a risk to commodity performance. Q1 GDP growth in the US was unusually weak, chalked up to weird swings in net exports ahead of Liberation Day tariffs. By contrast, recent economic activity—including retail sales and the unemployment rate—points to a solid pace of expansion.
According to a June 25 estimate from the Atlanta Fed, Q2 real GDP is running at a seasonally adjusted annual rate of 3.4%, well above the long-run average. Unless a recession develops, particularly in the US, we think the longer-term growth trend underpinning commodities may have room to run.
The bottom line
Diversified investors have long recognized the strategic benefits of including commodities within their portfolios. Volatility across the asset class jumped following the Liberation Day announcement, but has since moderated as the implementation of reciprocal tariffs was kicked down the road.
Nevertheless, we think it’s unlikely that the effective tariff rate drops to anything close to recent history—running the risk of stimulating inflation, while also lowering growth prospects. Though this environment may be unwelcome for US consumers and investors, commodities have often held up well during prior periods of “stagflation” due to their high sensitivity to inflation.
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1 Yale University Budget Lab, “State of U.S. Tariffs,” May 23, 2025.
2 OECD Economic Outlook, “Tackling Uncertainty, Reviving Growth,” Volume 2025 Issue 1, June 3, 2025.
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