Long Term Perspective

Since the Fed is so keen on inflation, they cannot simply wait until monthly data on the consumer price index or the PCE price index 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 the same economic environment often affects them.

Crude oil prices rose sharply in October and November. Record highs were being set over both months due to strong world-wide demand, a drop in the dollar, and concern that OPEC would not be boosting production.  On November 20, the spot price for West Texas Intermediate reached a then record high settle of $98.88 per barrel. Non-oil commodities picked up due to strong world-wide demand.