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Economy in Brief

Commodity Prices: Are They A Harbinger of Inflation or Real Growth?
by Tom Moeller  February 14, 2011

Consumer price inflation has been under control of late with both the overall CPI (1.4%) and the core inflation rate (0.6%) at their lowest since the mid-1960s. A popular harbinger of inflation, however, is the price of gold and it is suggesting future strength in pricing power. Yet the accompanying chart clearly indicates a sketchy performance of gold as an inflation indicator. True, the gold price and the CPI lines do roughly cross, 20 years apart. But so what? The level of gold prices rose ten-fold during the period while consumer prices rose just two-thirds. The interim variations in the two series, either levels or rates of change, don't correlate well either. During the last ten years there's been a low 30% correlation.

Recently, there has been attendant strength in most other commodity prices.

So do they suggest higher prices for finished product prices? In fact the answer is yes. During the last ten years there has been a high 64% correlation between the y/y change in industrial commodity prices and the change in the consumer price index for goods, despite the differing costs of production, processing, packaging, shipping, and retailing for each. The correlation with the overall CPI is a lesser 41% due to the minimal linkage between commodities and the services CPI. As an indicator of future inflation, the correlations fall.

As an indicator of industrial activity alone, commodity prices have even greater value than they do with consumer pricing power. The y/y change in the Journal of Commerce index of industrial commodity prices has a 78% correlation with the change in factory sector output. The bottom line is that commodity prices are being supported by the recent strength in industrial output. Moreover, their strength may eventually support the case for higher prices for finished products, but for now that correlation is being short-circuited. 

Commodity price data can be found in Haver's DAILY, WEEKLY and CMDTY databases.

Commodity Prices and Inflation is analysis from the Federal Reserve Bank of San Francisco in 1996. It can be found here.

Commodity Prices Latest Latest Y/Y 2010 2009 2008
Gold ($ per troy ounce.) 1,364.00 26.1% 1,224.3 972.3 872.0
Crude Oil ($ per barrel) 86.71 16.4 79.42 61.83 99.83
Commodity Research Bureau Spot Index - All Commodities (1967=100) 564 35.6 451 361 422
  Foodstuffs 495 44.0 379 310 373
  Livestock & Products 570 40.1 470 355 457
FIBER Industrial Materials Price Indexes (1990=100) 183 23.6 158 122 148
Textiles 92 17.1 81 73 74
  Cotton (cents per pound) 180 168.7 88.0 52.6 58.1
Metals 304 38.9 240 169 231
  Aluminum ($ per metric ton) 2,503 24.4 2,173 1,665 2,572
  Copper Scrap (cents per pound) 448 58.8 327 197 281
  Steel Scrap ($ per ton) 440 45.9 327 204 350
Miscellaneous 200 23.1 179 128 159
  Natural Rubber (cents per pound) 324 163.6 183 84 124
  Framing Lumber ($ per 1000 board) 297 -2.6 293 221 253
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