Metal prices surge: the next upside risk for U.S. CPI?

The continued rise in industrial metal prices is becoming a potential threat to the U.S. inflation outlook. With recent rebounds in oil prices, transmission of tariff costs, and resilient economic growth, multiple factors may combine to push CPI upward in the coming months. The Supreme Court’s upcoming ruling on the tariff issue also adds uncertainty to the short-term inflation trend.

According to "Zhui Feng Trading Desk," Deutsche Bank analyst Markus Heider stated in a report released on the 15th that the metals market is experiencing a strong rally. The LMEX industrial metals index has risen nearly 20% since December last year, and its cumulative gain since September has reached 30%. This rally, which began last autumn, has noticeably accelerated in recent weeks.

Inflation risks are accumulating. The November Producer Price Index (PPI) report released this week has shown signs of accelerating core consumer inflation. Meanwhile, energy prices, which previously served as a vital offsetting factor, have recently stopped falling and bounced back, eroding the buffer space for costs.

This risk is particularly prominent for the U.S. market. In recent months, tariff policies have added pressure to the cost side. If oil prices remain at current levels and economic growth stays robust, the rise in metal prices will more clearly represent an upward risk to the U.S. CPI.

Industrial Metal Prices Accelerate Upward

Deutsche Bank believes that the industrial metal rally that started last autumn has recently accelerated further. According to the performance of the LMEX index, the market has posted nearly a 20% increase within just a few months since December last year; looking at a longer cycle, the cumulative increase since September has reached 30%. This price trend reflects changing supply and demand dynamics in the industrial metals market.

There is a clear positive correlation between metal prices and inflation market valuations, based on two factors. First, base metals are a key driver of production costs; rising prices directly transmit to manufacturing costs, eventually affecting end-consumer prices. Second, metal prices share underlying drivers with inflation; for example, both typically perform well during periods of strong global economic growth—a shared macro environment that often causes both to fluctuate in sync.

Multiple Cost Pressures Converge

Deutsche Bank believes the cumulative upward risk to inflation stems from the combined effects of multiple factors. At the commodity level, energy prices have seen an important shift. Previously falling energy prices had helped offset other rising costs, but last week's oil rebound has changed this dynamic.

For the U.S., cost-side pressure is more complex. In the past few months, tariff policy has added to cost pressures, and the November PPI data released this week confirms this trend, showing some acceleration in core consumer goods inflation. If oil prices remain steady at current levels and economic growth stays strong, the rise in metal prices will more clearly manifest as an upward risk to the U.S. CPI.

The Supreme Court will soon issue a ruling related to tariffs under the International Emergency Economic Powers Act (IEEPA), bringing downward risk to the short-term inflation path, while also posing upside risk to short-term real yields. Deutsche Bank believes that in the current environment, market strategies may lean towards a combination of paying short-term real yields and going long on medium-term CPI—such as a 2-year/1-year (2y1y) configuration. Once the Supreme Court rules, risks may once again shift more markedly to the upside.

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The above highlight comes from Zhui Feng Trading Desk.

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