What Caused the Drop in Commodity Prices?

Commodity prices took a beating today. This Bloomberg headline sums it up well: Commodities Sink Most Since 2008 as Stocks Fall. But how can this be? We have been told repeatedly that the surging commodity prices are because of the Fed’s loose monetary policy. But U.S. monetary policy did not suddenly tighten. So what caused the drop in commodity prices? For those of us who have been arguing U.S. monetary policy has not been driving commodity prices, the answer is implied by this figure:

This figure indicates that the rapid growth of emerging economies is probably the real reason for the rapid changes in commodity prices over the past few years. This view is further borne out by evidence from the San Francisco Fed, Chicago Fed, and Marcus Nunes. The reason, then, for today’s fall in commodity prices appears to be the buildup of bad economic news that suggests the world economy and in turn the emerging economies may be slowing down. Now this is only a one-day move, but according to Felix Salmon it is a 5.4 standard deviation move that lines up nicely with the weakening global economic outlook. I just hope all the inflation hawks and hard-money types will use this experience as a “teachable moment.”

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About David Beckworth 240 Articles

Affiliation: Texas State University

David Beckworth is an assistant professor of economics at Texas State University in San Marcos, Texas.

Visit: Macro and Other Market Musings

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