What it means
Commodities are the raw materials of the economy, from crude oil and copper to wheat and cattle. A commodity index combines the prices of many of them into one number, so you can see at a glance whether raw material costs, overall, are rising or falling.
The CRB Index is one of the oldest and best known of these measures. The index is built from a basket of futures contracts, which are agreements to buy or sell commodities at a future date.
The basket covers several sectors such as energy, agriculture, metals and livestock, and each commodity is given a weight. Different versions of the index use different weights and methods, so you should always check which one is being quoted.
Why does the number matter? Rising commodity prices feed into the cost of producing almost everything, from food to plastics, so the index is often watched as an early signal of inflation.
Falling prices can suggest weaker demand and slowing growth, and central banks, economists and investors all use it as one of many indicators. Businesses can use it as a benchmark for their own input costs.
A manufacturer that buys metals and energy can compare changes in its supplier prices with the index to see whether a quoted increase is reasonable. Finance teams use it in budgeting, in sensitivity analysis and in deciding whether to hedge raw material exposure.
The index has limits. It measures broad prices, not the specific commodity a company buys, and it can be dominated by a few heavily weighted sectors such as energy.
Currency moves also matter because most commodities are priced in dollars, so a strong dollar can push the index down even if local prices are stable. Index level on its own has little meaning.
The useful measure is the percentage change between two dates, compared with changes in your own costs.
In practice
Real-world examples.
Example
A food manufacturer sees the CRB Index rise 8% in a quarter. The purchasing manager uses it to prepare for higher quotes from grain and energy suppliers. The company asks suppliers to explain any price rise that is much larger than the index move.
Example
An economist at a bank includes the index in a dashboard of inflation indicators. When it falls for several months, she lowers her estimate of future price pressure. She combines it with other measures such as consumer prices and wage data.
Example
A construction company with a fixed-price contract worries about metal and fuel costs. The finance director tracks the index to decide whether to buy materials early. He decides to buy part of the order now and the rest later to spread the risk.
Formula
Calculation
Index level = (Current cost of basket / Cost of basket in base period) x Base index value
Take a simplified basket that cost $1,000 in the base period, when the index was set at 100, and now costs $1,150.
Index level = ($1,150 / $1,000) x 100 = 115.
The index has risen 15% since the base period.
If the basket later falls to $1,092.50, the index becomes ($1,092.50 / $1,000) x 100 = 109.25, a fall of ($115 - $109.25) / $115 = 5%. Check: $1,150 x 0.95 = $1,092.50, which confirms the 5% fall.Case study
Seen in the real world.
Westbrook Components is an illustrative, fictional manufacturer that buys steel, copper and energy. In its annual budget the finance team assumed that raw material costs would stay flat, but the CRB Index began to rise sharply in the second quarter. The company supplied parts to car makers under fixed-price contracts, so it could not pass on cost increases quickly.
The financial controller compared the index with the company's actual supplier invoices and found that its costs were rising more slowly than the index. She used this to challenge two supplier price increases and negotiated smaller rises. She presented the comparison to the purchasing team as a monthly report.
In this illustrative case the company also bought forward 40% of its expected copper needs while prices were still moderate. The index later rose further, and the early purchase protected the year's margin.
Watch out
Common mistakes.
- Assuming the index reflects the prices of the specific materials your company buys.
- Quoting the index level as a percentage, rather than calculating the change between two dates.
- Ignoring that different versions of the index use different weights and methods.
Questions
People also ask.
What does the CRB Index measure?
It measures the general level of commodity prices by tracking a basket of futures contracts across energy, metals, agriculture and livestock.
Why do economists watch it?
Because commodity prices tend to move before consumer prices, so it can offer an early clue about inflation trends.
Can you invest in it?
Not directly, but funds and products that follow commodity indexes exist, and they carry risks such as futures roll costs and price swings.
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