Saturday, October 28, 2006

Oil Price Decline Gives Misleading Picture of Commodity Trends

After its July peak of $78 per barrel, oil prices fell by more than 25% to a low of $58 per barrel. After that it has recovered slightly to $61, but that still means it is 22% below the peak. This have lead some people to conclude that the commodity price boom have ended and been partially reversed.

However, the fact is that the oil price decline is not reflective of a broader bear market in commodities. Indeed, the fact is that the bull market in non-energy commodities have continued. The Economist's
commodity price index (which include most commodities except energy and precious metals) have continued rising rapidly. In the latest issue, the index fell back slightly from last week, from 184.7 to 183.8. Yet it is still near its record high, up 6.7% the latest month, and a full 36% the latest year.

Another index measuring non-energy commodities, the CRB Spot Index, have increased somewhat more slowly than The Economist's commodity price index, yet it is at record high levels and is up 2.5% in the latest month and up 18% the latest year.

We can thus see that the decline in oil prices reflect oil specific factors (such as a declining fear of a U.S.-Iranian military confrontation) and is unrepresentative of the broader commodity price trend. This means that the much hyped "core" price inflation measures is not likely to decelerate, despite the slowdown in U.S. economic growth.


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