The PowerShares DB Commodity Tracking ETF (DBC), the commodity benchmark, returned 7.5% over the period of a month. The ETF had a low of $11.88 on January 20, 2016. It has recovered slowly from this level. Since January 20, 2016, it has returned 13.2% as of March 11, 2016.
The rise in the commodity index can be correlated to the weaker US dollar (UUP). In mid-February 2016, Federal Reserve chair Janet Yellen stated that the committee would be cautious on further rate hikes as the global growth risk became a major concern. After this statement, the dollar weakened, which helped commodities rally. Now let’s analyze how CPI (consumer price index) and PPI (producer price index) for the United States (QQQ) (SPY) (VOO) relate to the commodity index movement.
CPI and PPI also followed the movement of the commodity index
On March 31, 2010, CPI stood at 2.3%. On April 30, 2011, CPI was at 2.7%. During this period, the commodity index (DBC) rose by 31.5%. PPI followed the same movement as DBC. It stood at 5.9% on March 31, 2010, and on April 30, 2011, it stood at 6.6%.
When the commodity downturn started in mid-2014, CPI and PPI also started falling. From mid-2014 to the present, DBC has fallen almost 50%. From the graph, we can see that the CPI and PPI movements also followed the movement of a commodity index. Although both CPI and PPI are economic indicators, measuring the fluctuations in the prices of goods and services, they are different in the types of prices collected for those goods and services. Energy and food and non-alcoholic beverages command 7% and 8.4% weight, respectively, in the CPI basket.
In the next part of this series, we’ll take a look at how the movement of interest rates affect commodity prices.