Long Term Perspective
Since the Fed is so keen on inflation, they can't simply wait until monthly data on the consumer price index or the PCE deflator are available. Consequently, Fed officials closely monitor commodity prices of all stripes. In addition to giving clues on inflation, changes in commodity prices reveal strength or weakness in economic activity as well. When commodity prices are rising rapidly, this often suggests that industrial activity is picking up steam. Conversely, when commodity prices are falling, industrial activity might be waning. The chart here depicts a spot commodity index that does not include any energy prices.

Oil is important to all facets of our life and thus oil prices are a key indicator that could signal potential inflationary pressures - or changes in economic growth. The economy often moderates in response to rapidly rising oil prices - and each of the recessions since 1971 have been preceded by an oil price shock. The 1970s Fed was blamed for exacerbating the inflation spiral by an overly accommodative policy during the oil embargo. Since then, the Fed has operated more carefully when sharp oil price changes have caused the U.S. economy to jump up and take notice.

Short Term Perspective
The futures commodity price index depicted here includes unleaded gasoline prices, but it is the only energy component among industrials, grains, livestock & meat and precious metal prices. Notice that this index does not always move in sync with crude oil prices. However, it is not unusual to see many types of commodity prices move in tandem since they are often affected by the same economic environment.

Crude oil and commodity prices mostly declined in August despite an announcement by BP that they were shutting down half of the Alaska pipeline production due to erosion problems that needed attending. Pump prices, for the most part, remained near $3 per gallon.