Avid viewers and readers of Bloomberg, like myself, may have noticed a recent article “Commodities’ Biggest Drop Since Lehman Is A Bear Signal”. They use a little-quoted index of commodities, the “Journal of Commerce Industrial Price Commodity Smoothed Price Index”, claim that it “reflects clearer signs of supply on demand because half the items it tracks don’t trade on exchanges used by speculators” and cite a 57% “plunge” in May!
For me, as a commodity researcher, this seems like huge news. Bloomberg seems to be saying that real-world, unmanipulated commodity prices have halved in a month, and speculator’s presence in the bigger markets is hiding this ‘reality’ from investors. Right?
The Bloomberg TV report (I’m trying to get a screen capture, but can’t find the video archive) even compounds this error by showing this -57% figure underneath daily and monthly prices changes for other assets such as WTI crude oil.
First lesson, go to the source and understand your data. Bloomberg, quote the “Journal of Commerce Industrial Price Commodity Smoothed Price Index” as being at 60.56 at the end of April 2010, and 25.97 at the end of May 2010. That’s a drop of 57%, as they state.
So, what is this index measuring? And, how can a commodity price index be negative, as it was in July 2009? The main problem, it’s not a price index! It measures the year-on-year growth, as a percentage, of the tracked commodity prices over the previous year. Confusingly, the Bloomberg page states “the base rate of this index is 2006=100”. To me, this bit is plain wrong. A quick bit of charting shows the index varied between 0 and around 25 during 2006.
So, what the index really tells us, is that the commodities prices tracked by the index grew 60% between April 2009 and April 2010, but only 26% between May 2009 and May 2010. Another way of expressing this, far more fairly, would be:
“Commodity Price Growth reduces to 26% p.a.”
That’s the real story. There’s a huge difference between a growth-rate index and a price index. Reporting the change in a growth-rate index (itself a percentage) by dividing and quoting this as another percentage makes no sense. If inflation goes from 5% one month to 4%, is inflation -20%? No.
Rein in your sensationalist reporters, Bloomberg.