Commodity price index signals further terms-of-trade lift

By Leith van Onselen

The RBA has released its commodity price index for May, which increased by 0.5% in SDR (currency weighted) terms – the key determinant of the terms-of-trade – and by 2.5% in Australian dollar terms:

Preliminary estimates for May indicate that the index increased by 0.5 per cent (on a monthly average basis) in SDR terms, after increasing by 2.7 per cent in April (revised). The non-rural subindex increased in the month, while the rural and base metals subindices decreased. In Australian dollar terms, the index increased by 2.5 per cent in May.

Over the past year, the index has increased by 12.6 per cent in SDR terms, led by higher iron ore, LNG and, beef and veal prices. The index has increased by 18.3 per cent in Australian dollar terms.

Consistent with previous releases, preliminary estimates for iron ore, coking coal, thermal coal and LNG export prices are being used for the most recent months, based on market information. Using spot prices for the bulk commodities, the index increased by 0.8 per cent in May in SDR terms, to be 15.5 per cent higher over the past year.

Over the May quarter, the index of commodity prices rose by 1.8% in SDR terms and by 3.9% in Australian dollar terms. Over the year, they rose by 12.6% (SDR terms) and by 18.3% (Australian dollar terms) respectively.

The six month moving average trend in prices is presented below. As you can see, commodity prices are growing solidly:

As noted above, the SDR commodity price is a key determinant of the terms-of-trade (ToT), and the strong rise suggests a jump in the Q1 ToT and national income when the quarterly national accounts are released tomorrow, as well as a further lift when Q2’s national accounts are released in early September.

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