The RBA has released its commodity price index for February, which registered another 2.7% fall in SDR (currency weighted) terms – the key determinant of the terms-of-trade – but a small 0.1% rise in Australian dollar terms, on the back of ongoing currency depreciation:
Preliminary estimates for February indicate that the index declined by 2.7 per cent (on a monthly average basis) in SDR terms, after declining by 0.1 per cent in January (revised). A significant contributor to the decline in February was the price of iron ore. The base metals and rural commodities subindices also declined during the month. In Australian dollar terms, the index increased by 0.2 per cent in February.
Over the past year, the index has fallen by 20.6 per cent in SDR terms, largely driven by falls in the prices of bulk commodities. The index has fallen by 16.2 per cent in Australian dollar terms over the past year.
As stated above, falling iron ore prices were the main driver of the ongoing slump in the commodity price index.
Over the three months to February, the index of commodity prices declined by 5.7% in SDR terms, but was up 0.8% in Australian dollar terms. Over the year, they were down by 20.7% (SDR terms) and 16.2% (Australian dollar terms) respectively.
And the six month moving average trend in prices is presented below. As you can see, commodity prices have been falling for an extended period in SDR terms, with no turnaround in sight:
As I have noted previously, there is a strong correlation between the terms-of-trade and the RBA’s commodity price index in SDR terms (see next chart).
Therefore, the weakness on display over the first two months of this year, whereby the commodity price index has fallen by 2.8% in SDR terms, suggests that the terms-of-trade will take yet another hit when the national accounts for March 2015 are released. This, of course, follows the release today of the December quarter national accounts, which will reveal another 1.7% seasonally adjusted hit to the terms-of-trade on lower commodity prices.
The national income shock rolls on…
