Bloomberg News
Sat, 18 Aug 2001, 8:20am EDT
Economists Look Beyond CRB Index for Inflation Signs
By Stephen Voss & Claudia Carpenter
Chicago, Aug. 17 (Bloomberg) -- Paul Kasriel was an economist at the Federal
Reserve Bank of Chicago in 1973, when inflation was soaring. The Commodity
Research Bureau index of commodity prices, which rallied 48 percent that year,
was constantly on his radar screen.
``It was the only index we had, the most readily available index that gave me a
quick snapshot of potential inflationary pressures,'' Kasriel recalls. ``I woke up
with it.''
Prices back then for metals, fabrics and foodstuffs were rising along with gold
and gasoline, and inflation, as measured by the Consumer Price Index, surged.
Today, Kasriel, who is chief economist at Northern Trust Securities in Chicago,
still looks for quick snapshots of the economy, though the CRB index, which
doesn't reflect the growing importance of services to the economy, is now low on
his list.
``It doesn't measure service-sector inflation, and about 58 percent of the CPI is
made up of prices of consumer services,'' he said. ``So we can have inflation
moving up, even though commodities and goods prices are moving down.''
Raw materials, the stuff you grow, mine and pump, have become a smaller
fraction of the economy, as manufacturing and farm industries gave way to
services and technology companies.
Goods-producing industries account for a fourth of U.S. gross domestic product
now, down from a third in the late 1970s, according to government figures. With
the possible exception of energy, raw material prices now are overshadowed by
costs for labor, marketing, technology and processing.
``The price of commodities gives you a better handle on how the economy is
doing on an industrial activity basis than it does on inflation,'' said Gerald Lucas,
a senior government bond strategist at Merrill Lynch & Co.
Inflation Measure
Inflation accelerated in 1973, as oil prices rose from around $3 a barrel to $12.
Consumer prices were 8.9 percent higher in December 1973 than they were a
year earlier, based on the CPI, almost three times the 3.4 percent inflation rate in
1972.
More recently, though, a tripling of oil prices to more than $30 a barrel in October
2000 from $10 in late 1998 failed to spark inflation. While the CRB rose 21 percent
during the period -- platinum, copper and natural gas prices had also jumped --
the year-over-year rise in consumer prices peaked at 3.8 percent in March 2000,
only 2.2 percentage points higher than the inflation rate at the end of 1998.
``Years ago, you would look at the CRB and you could almost correlate a rise in
that to a decline in bond prices, said Vince Menna, a first vice president at Credit
Agricole in New York. It doesn't work that way now, he said.
Among commodities, ``in terms of overall inflation, energy is the biggest place
where I would focus,'' said Gemma Wright, director of market strategy at
Barclays Capital.
``Ten years ago, I looked exclusively at the CRB index and the equity market
utility index,'' Wright said, adding that now she looks at other indexes and prices
for specific raw commodities, such as copper, lumber, palladium and energy.
Outdated
The waning influence of agriculture, and more recently, a revival in the
importance of energy, has left the CRB behind, some economists say. Crop
markets, such as soybeans, cocoa and orange juice, take up eight of its 17
equally weighted components, while energy accounts for only three.
The CRB index was designed ``so the marketplace could have an index that
would provide a representation of the total movement in commodity prices,'' Bob
Hafer, managing director of the Commodity Research Bureau in Chicago, said in
an interview last week. The bureau started the CRB index in 1957.
``As it turned out, through the 1960s, 1970s, and even the 1980s, it was an
excellent indicator of inflation and deflation,'' he said. ``Beginning in 1995, it
appears as though its ability to predict inflation has become somewhat
suspect.''
The CRB index is owned by Bridge Information Systems Inc., a financial data
provider that has filed for bankruptcy protection. U.K.-based Reuters Group Plc
has offered to buy most of Bridge's assets, including the CRB index.
Bridge and Reuters compete with Bloomberg LP, parent of Bloomberg News, in
providing news and data.
New Index Replaces CRB
The failure of the CRB to reduce the influence agricultural markets on the index
has prompted the New York Board of Trade to announce plans to scrap CRB
index futures in favor of a new commodity index produced by Standard & Poor's
that's weighted toward energy markets.
Some economists are already leaning that way, using indexes skewed more
toward energy and industrial prices, such as the Goldman Sachs Commodity
Index, and the Journal of Commerce's index covering prices of 18 industrial
materials.
``It makes sense to strip out all of the extra stuff and focus on any one metal and
energy source that is a better economic predictor,'' said John Herrmann, chief
economist at IDEAglobal, a research and strategy firm for equity and fixed
income investors.
Energy contracts will make up 44.4 percent of the new S&P Commodity Index,
compared with about 18 percent on the CRB.
The new index does not include gold. Historically, the precious metal would rally
when inflation or recession threatened other markets. It rarely reacts that way
now.
Ultimately, the correlation of the CRB and other commodity indexes to inflation
has declined because more than half of the Consumer Price Index is made up of
costs related to services, economists said.
``Commodities are such a small fraction of everything we buy,'' said Neal Soss,
chief economist at Credit Suisse First Boston in New York. ``There is very little
wheat in a box of Wheaties.''
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