The Behavior of Non-Oil Commodity Prices

The need to understand the factors that influence the behavior of commodity prices has taken on a special urgency in recent years, as nonoil real commodity prices have been declining almost continuously since the early 1980s. Since their short-lived recovery in 1984, real non-oil commodity prices have fallen by about 45 percent, translating into a sharp deterioration in the terms of trade for most commodity-dependent exporters. As Chart 1 illustrates, in 1992 the price of non-oil commodities relative to that of manufactures reached its lowest level in over 90 years.1 The longterm behavior of real commodity prices would thus appear to lend some support to the well-known Pre bisch-Singer hypothesis.2 This pattern in commodity prices has important practical implications for policymakers. For example, the presence of a negative trend in commodity prices implies continuously worsening terms of trade for many commodity-dependent countries, and further that efforts to stabilize the incomes of producers for an extended period of time may not be financially sustainable.