Commodity prices suggest world econ is troughing

 I talked about this, before, here.

The inverse relationship between the economy and commodity prices goes back a long way.  In the chart below, I show my calculation of world industrial production, compared with CRB commodity price index, inverted and lagged 24 months.  Why inverted, and why lagged?

When commodity prices surge, commodity exporters gain, but they don't necessarily spend their gains immediately.  Think of a rise in the oil price.  Motorists everywhere have to pull in their belts, but oil producers might just accumulate any windfall.   Total world demand, GDP, industrial production, etc., tend to go down.  At the same time, central banks respond to the rise in inflation caused by rising commodity prices by tightening monetary policy, and governments by tightening fiscal policy.   So a rise in commodity prices ultimately leads to a  fall in economic activity, and the response is lagged.  On the basis of the last 70 years, the lag is about 18 months to 2 years.

The irony is that a sharp rise in economic activity can lead to a jump in commodity prices which in turn leads, 2 or 3 years later, to a collapse in the economy, which leads to a plunge in commodity prices, and so on.  War, oil boycotts, sanctions can complicate this relationship, but the economic fundamentals remain critical.  For example, the export embargo by oil producers which led to the 1973 oil crisis and the deep 74/75 recession, only worked because economic demand was so strong.   

Right now, the turn in commodity prices, i.e., their sustained fall, is consistent with a troughing in the world economy towards the middle of this year.  It's not just the oil price which is falling, but also food prices.  Leading indicators, such as PMIs, have passed their low point, but the actual economy lags PMIs by 3 to 6 months, so that is also consistent with a mid-year turn. 

Why haven't we had the deep recession I forecast in my earlier piece?  Partly the stimulus provided by massive deficit spending by the USA as a result of the so-called Inflation Reduction Act ("IRA"), partly the spending rebound as the world came out of the covid crash lockdowns.   What will be the next factors to throw my forecasts awry?  Covid certainly threw several massive spanners into the works!