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Prospects: What Are Commodity Prices Telling Us?
[private]The recent 5% drop in commodity prices has contributed to fears the recoveries US and global economies may be at risk.
Plunging commodity price swings have only a so-so record predicting U.S. recessions. A drop in commodity pries of 10% or more is associated with a recession or a major slowdown less than half the time.
However a 10% drop has always been associated with a recession if the collapse was preceded by a sharp spike in energy prices. Unfortunately, energy prices have risen over 50% since September 2010.
The drop in commodity prices supports the Fed notion that the rising 3% plus headline CPI inflation rate will eventually fall back towards the slower1 ¼% pace of the core rate.