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Dec 31 2018

ECRI Commodity Price Index that Foresaw Oil Price Plunge Still Sliding

Back in April, crude oil prices were soaring, and were already higher than at any time since 2014.

But it wasn’t just oil. “Dr. Copper” – the price of copper, whose fabled prescience had led analysts to award it a “Ph.D. in Economics” – was also ramping up, approaching its highest level since 2014. So had nickel prices. And aluminum prices hadn’t been that high since the summer of 2011.

With the prices of oil and primary metals prices surging in sync, there was widespread agreement that the reason had to be a ramp-up in global demand. After all, the widely-watched Global Manufacturing PMI was still hovering near December’s 82-month high.

Therefore, most reasoned that global industrial growth had to be strong. And among the many who believed that “price leads fundamentals,” the rise in commodity prices was proof positive that global growth would strengthen further.

ECRI’s leading indexes disagreed. Not only had growth in our Global Leading Manufacturing Index dropped to a 26-month low, but also ECRI’s measure of industrial commodity price inflation – growth in ECRI's Industrial Price Index (IPI)* cooled since the winter.

We decided to investigate how Dr. Copper and its cohorts could be so out of cyclical step, cross-checking with the roughly half of ECRI IPI components that weren’t exchange-traded, unlike crude oil and most primary metals. Our findings revealed an unusual divergence between exchange-traded and non-exchange-traded commodity price inflation that proved very rewarding.

We detailed our findings in our April International Cyclical Outlook report, concluding that “[s]piking commodity prices have misled the markets into optimism about the global industrial growth outlook. In fact, those prospects have already dimmed, according to ECRI’s leading indexes, which are designed to discern cyclical signals from noise.”

A couple months later, we first publicly shared our findings about how this unusual divergence in commodities was spotlighting a global slowdown:

Yet, as late as November, the consensus was sufficiently confused that a news story about that divergence was headlined, “Markets Must Decide Which History to Believe.”

At the end of November, we further explained the basis for our contrarian view:

“A key reason the IPI is so different from other commodity price indexes is that about half the commodities it tracks aren’t exchange-traded. So it isn’t jerked around by speculative forces the way exchange-traded commodity prices – like oil prices – can be. Anchored by the prices of commodities that are less familiar but are also vital industrial inputs, the IPI provides a more reliable read of cyclical swings in broad commodity price inflation.

Importantly, the IPI isn’t a stand-alone tool, and is best used in the context of ECRI’s understanding of cycles in global industrial growth. In fact, we first forecast the current cyclical slowdown in global industrial growth more than a year ago.”

As investors look for clues to the next upturn in commodity price inflation and global growth, the ECRI IPI, along with our array of sequential leading indexes of global growth, is likely to provide the most reliable early warning.

Download our recent track record here in PDF.

For more information on ECRI professional services please contact us.


* Known earlier as The JoC-ECRI Industrial Price Index and distributed on the Bloomberg terminal, the IPI was created in 1986 by ECRI co-founder Geoffrey H. Moore, who had pioneered the development of leading indexes of business cycles at the National Bureau of Economic Research. The IPI is based on the prices of 18 industrial commodities tracked by the index, compiled every weekday by ECRI, which retains full ownership of the IPI.

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