Commodity Index’s Dip Seen as Curb on Inflation

A key U.S. commodity index fell to a four-year low Friday, signaling an underlying weakness in the market for raw goods that should keep inflation under control, possibly through next year, analysts said.

The Commodity Research Bureau Index, which tracks the movement of 21 commodity futures markets, including grains and metals, fell to 206.55, its lowest since March, 1987.

The index, traded at the New York Futures Exchange, is watched by economists and the Federal Reserve as a key indicator of inflation.

“I believe we’re in a situation (of) a global surplus of most of our broad industrial commodities that’s going to continue for at least another year,” said Paul Prentice of Farm Sector Economics Associates of Maryland.

Depressed commodity prices may also indicate that the economic recovery, which White House economic adviser Michael Boskin said this week had begun, may get off to a weak start.

“If we were seeing a serious turnaround right now, we would be seeing some strength in these markets and we don’t seem to be finding that strength,” said James Nevler, analyst at the Commodity Research Bureau.

“You seem to have, with very few exceptions, surpluses in almost every commodity. It’s very hard to find a market that’s a legitimate market in any way, shape or form,” he said.

Some analysts look to the index, rather than government indicators, to predict coming inflationary trends because it tracks the prices of commodity futures markets rather than past economic performance.

But they cautioned that although the index might be a good indicator of inflation in some sectors of the economy--such as food prices--it is not an accurate gauge overall. Also, the index reflects the price movements of highly speculative markets.

Raw commodities increasingly make up a smaller share of price of finished goods, while fluctuations in wages and other costs can have a large price impact.