How Raw Material Prices Can Forecast the Economy's Direction

Yesterday, Eero Pikat, President of Barchart, joined Kai Ryssdal and Maria Hollenhorst of the Marketplace podcast to discuss the importance of the CRB Raw Industrials Spot Price Index (BVY00).

In this interview, Pikat shed light on how the prices of raw materials can be an indicator of business activity and therefore an important gauge on how the U.S. economy is performing.  Raw materials are commodities that are used in the production or manufacturing of a variety of products, such as pharmaceuticals, clothing, and machinery. 

This CRB Raw Industrials Spot Price Index was created in the midst of the Great Depression, almost 90 years ago. Eero Pikat said, “The Department of Labor started to track various inputs that sort of could theoretically control or influence the economy. And so a series of indexes were created, including the raw industrials index.”

The index is composed of prices of the following commodities: hides, tallow, copper scrap, lead scrap, steel scrap, zinc, tin, burlap, cotton, print cloth, wool tops, rosin, and rubber 

Pikat said, “It’s essentially a predictor of some of the macroeconomic trends that happen three [or] six months down the line.”  In the past year, the CRB Raw Industrials Spot Price Index is down almost 20%:

As the chart above shows, raw material prices have been range bound since November of last year. Pikat said this shows that, “the last one or two interest rate hikes haven’t really had the same deflationary impact as perhaps the Fed would have [hoped].”

Yesterday, the consumer price index for February was released that showed an increase of 6% from a year ago. Though this was in line with the market's expectations, this is significantly higher than the Federal Reserve's goal of 2%.