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Industrial Price Index Moves into Positive Territory for First Time in 11 Months

August 3, 2009
The Journal of Commerce-Economic Cycle Research Institute index of global industrial prices moved into positive territory for the first time in almost a year in its most recent week, signaling an improvement in global demand for the raw materials that go into industrial production, The Journal of Commerce reported.

Based on the daily prices of raw materials used in industrial production, the Industrial Price Index (IPI), ended the week of July 24 more than 3.3 percentage points higher than the previous week, reaching 86.1637, the highest point for the IPI has since October 24, 2008.

The gain marked a 4.54% improvement over the index's average over the previous 52 weeks, the first time the IPI has grown since the first week of August 8, 2008, shortly before the onset of a steep decline in world financial markets.

"That's a pretty dramatic recovery when you consider that we were at minus 69.9% on Dec. 8," said Lakshman Achuthan, managing director of ECRI, the New York-based economic forecasting firm that compiles and tracks a number of leading indicators for economic activity around the world. "That's very consistent with the restarting of global industrial activity. In some cases that's associated with an outright upturn in the business cycle of some economies."

The upturn is occurring in the U.S. and Asia, excluding Japan and the U.K., he said. "The industrial upturn is now being joined by a broader economic recovery," Achuthan said. "But in continental Europe and Japan, the recovery is not yet in clear sight."

The IPI has fluctuated in the low 80s since June 5, and after two weeks of downticks, the index moved up 3.33 points to its 2009 high of 86.1637 for the week ending July 24.

On a strict year-over-year basis, the index remains far below the 132.2840 recorded a year ago, but the sequential increase suggests growing confidence and competition for raw materials in industrial markets.

The JoC-ECRI Industrial Price Index was created in 1985 by Geoffrey H. Moore, the economist who pioneered the study of business cycles at the National Bureau of Economic Research, where a committee of economists that he established is still the official judge of when the U.S. economy goes into and out of a recession.

The index is based on the prices of 18 industrial commodities that are tracked by the index that is compiled every weekday by The Journal of Commerce and ECRI.

The IPI is not a weighted average, but a pure reflection of prices. It does not include agricultural commodities or precious metals such as gold or silver, but only materials that are used in industrial production, such as nickel, tin, aluminum, plywood, benzene, cotton, burlap, and crude oil.

In addition, half the commodities in the index are not "exchange-traded" commodities, which means their prices are not established on the floors of any of the world's commodity exchanges. This serves as a reality check on the prices of the other half, so the index cannot be skewed if a hedge fund or a speculator tries to manipulate the price of a commodity.