The Crb Index Versus The Ppi And The

Most observers look to popular inflation gauges like the Consumer Price Index (CPI) and the Producer Price Index (PPI) to track the inflation rate. The problem with these measures, at least from a trading standpoint, is that they are lagging indicators. The PPI measures 2700 prices at the producer level and is a measure of wholesale price trends. The CPI is constructed from 400 items, including retail prices for both goods and services, as well as some interest-related items (about one-half of the CPI is made up of the price of services and one-half of commodities). Both indexes are released monthly for the preceding month. (I'm referring in this discussion to the CPI-W, which is the Consumer Price Index for Urban Wage Earners and Clerical Workers.)

The CRB Index measures the current trading activity of 21 raw materials every 15 seconds. (A futures contract on the CRB Index was initiated in 1986 by the New York Futures Exchange, which also provides continuous updating of CRB Index futures prices.) Inasmuch as commodity markets measure prices at the earliest stage of production, it stands to reason that commodity prices represented in the CRB Index should lead wholesale prices which, in turn, should lead retail prices. The fact that CRB Index prices are available instantaneously on traders' terminal screens can also create an immediate impact on other markets.

A SURGE IN OIL PRICES DURING THE FOURTH QUARTER OF 1989, SIGNALING HIGHER INFLATION, HAD A BEARISH INFLUENCE ON BOND PRICES AND HELPED PUSH INTEREST RATE YIELDS HIGHER._

March Treasury Bonds

March Treasury Bonds

A SURGE IN OIL PRICES DURING THE FOURTH QUARTER OF 1989, SIGNALING HIGHER INFLATION, HAD A BEARISH INFLUENCE ON BOND PRICES AND HELPED PUSH INTEREST RATE YIELDS HIGHER._

February Crude Oil

B-15 8-22 6-28 M> 9-13 9-20 VE 104 10-11 10-18 15 25 11-1 1113 11-15 11-22 11-30 12-7 12-14 12-2] 12-29

12/29/69

B-15 8-22 6-28 M> 9-13 9-20 VE 104 10-11 10-18 15 25 11-1 1113 11-15 11-22 11-30 12-7 12-14 12-2] 12-29

12/29/69

Despite their different construction and composition, there is a strong statistical correlation between all three measures. Comparing annual rates of change for the CPI and the PPI against cash values of the CRB Index also reveals a close visual correlation (see Figures 7.17 and 7.18). The PPI is more volatile than the CPI and is the more sensitive of the two. The CRB, representing prices at the earliest stage of production, tracks the PPI more closely than it does the CPI. Over the ten years ending in 1987, the CRB showed a 71 percent correlation with the PPI and a 68 percent correlation with the CPI. During that same period, the CRB led turns in the PPI by one month on average and the CPI by eight months. (Source: CRB Index White Paper: An Investigation Into Non-Traditional Trading Applications for CRB Index Futures, New York Futures Exchange, 1988, prepared by Powers Research, Inc. Jersey City, NJ.)

From the early 1970s through the end of 1987, six major turning points were seen in the inflation rate, measured by annual rates of change in the CPI. The CRB Index led turns in the CPI four times out of the six with an average lead time of eight months. The two times when the CRB Index lagged turns in the CPI Index (1977 and

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