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June 1985, Vol. 108, No. 6
Commodity price volatility:
trends during 1975-84
It has long been observed that commodity prices exhibit wide ranges of variability. Some prices persistently fluctuate sharply from month to month because of special supply or demand factors (or both) relating to respective commodity markets. In such cases, supply and demand are said to be "price inelastic," meaning that a small shift in supply or in demand results in a large price change. This occurs most frequently in competitive markets for goods which have only limited substitutes. For example, agricultural products and their derivatives are subject to sharp price changes because of the influence of weather on production and marketing. Demand (and hence prices) for basic materials traded internationally may change rapidly because of exchange rate movements, political turmoil, or large purchases by governments.
These are the primary factors which have been cited as causing commodity price instability. (Note that we are discussing microeconomic factors relating to particular products, not macroeconomic factors.) It is believed that these factors affect certain commodities more than others. Likewise, the volatility of prices for these commodities is generally regarded as persistent.
We intend to test these widely held beliefs by analyzing short-term price movements for a broad range of goods over a 10-year period. A judgmental sample of 156 Producer Price Indexes for commodity groupings was chosen for this purpose.1 For each index series, monthly percent changes were computed from January 1975 to December 1984 (seasonally adjusted data were used if available between 1979 and 1984). Data were excluded for the pre- 1975 period, which was marked by a series of major grain- and oil-related "shocks."2
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1 This sample includes nearly all of the indexes shown in table 2 (plus a few others) of the monthly Producer Price Index news release and the detailed report. Items were omitted if they carried negligible weight or if there were fewer than 6 years of historical data.2 For comparison purposes, the same calculations were also made for the unadjusted time series. As expected, the unadjusted indexes tended to be more volatile, but the differences were generally minor.
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