Commodity prices are like a barometer for the economy, reflecting supply-and-demand dynamics across various sectors. In fact, commodities make up close to 36% of the Consumer Price Index. Several factors contribute to commodity prices, which include cost of production, monetary policy, demand growth, supply constraints, and currency depreciation. Commodity prices for essential needs such as groceries, automobiles for transportation, and heating and cooling for homes directly affect consumers. It's interesting to see how some commodities' price patterns compare to others over time. Which commodities' price patterns are more volatile? Which are less volatile?
We assessed the volatility of commodity prices gathered by the World Bank from 1960 to 2021. Volatility measures how much and how often the price of a commodity fluctuates over time. Several types of events can influence these fluctuations, including supply and demand, geopolitical tension, and environmental conditions. Commodity price volatility is a useful metric for a variety of scenarios. Traders use the metric to help predict future prices. Business owners, who rely on specific commodities to operate their businesses, rely on volatility metrics to plan for expenses. The factors that cause commodity price volatility are mostly unpredictable, and thus analytics that focus on identifying trends are useful for managing the risks and rewards associated with price fluctuations.
Banana and orange prices have increased at a fairly steady rate since 1960 (on average, 1–2 cents per year). Their respective volatility scores are 2.02 and 3.27. Although these fruits are less volatile commodities (compared to sugar or coffee) and may be less directly impacted by short-term fluctuations, their positive trend proves that they are still influenced by broader economic trends and long-term inflationary pressures.
The chart below shows the volatility score for each commodity in the dataset.
Here's that plot again for commodities categorized as agricultural products, soft commodities, and livestock and meat. The data has been grouped by leading export countries to draw attention to the potential geopolitical influences of commodity price volatility. A deeper analysis of key events involving Germany could shed light on the volatile nature of sugar prices, taking into account that Germany is not the only exporter of sugar.
Commodity price volatility is a useful tool for gauging the economy's health, and Data Explorers is committed to developing insightful data products that leverage this volatility to provide real-time insights, enabling businesses and investors to make informed decisions, manage risks, and capitalize on market opportunities.
