Commodity prices in biggest monthly drop since 1980

Commodity prices fell by 10 per cent last month, indicating that the five-year-long commodities price boom is coming to an end and easing pressures on the Bank of England to raise interest rates this week.

The Jefferies-Reuters CRB Index, a composite, shed 10 per cent of its value during July, the biggest monthly drop since 1980. In volatile trading on Friday platinum prices fell almost 7 per cent, while gold and silver declined by about 1 per cent. Rice and other "soft" commodities are also down.

However, it is oil that has seen the biggest switchback – down 13 per cent or more since June's record levels. Having comfortably crested the $100/barrel mark and threatened $150/barrel earlier this year, the price is now closer to $120/barrel. Analysts see it at or below $100/barrel within months: Deutsche Bank suggests a "reversal" of the move from $60/barrel since 2007; Lehman Brothers put oil at $90/barrel early in 2009. The consensus is around $100.

With a fall of around a third from the peak, oil price declines should feed through to a rapid fall in consumer inflation, vindicating claims by the Bank that the present jump in prices is more of a "spike" than a long-term trend.

Evidence that wages growth is muted is another "doveish" factor.

On Tuesday the United States Federal Reserve and on Thursday the Bank of England and the European Central Bank will meet to set rates. With extremely weak data on economic growth coming through and the most recent news on commodity prices, many believe that rate rises can be avoided.

Sharply lower demand, especially from the US, is the principal factor pushing down the price of crude, as the slowdown continues. Lehman Brothers says that "over the first half of the year, US oil demand surpassed all negative expectations".

The rate of increase in demand from China and India is also expected to moderate, both as the rapid growth in their economies slows and as energy efficiency measures and substitution of expensive commodities for cheaper ones gathers pace.

The reform of fuel subsidies in India, China, Taiwan, Malaysia and other emerging markets is also helping matters.

The International Energy Agency has halved its forecast for the growth in global oil demand in 2008.

On the supply side, analysts point to new Opec and non-Opec projects coming on stream, and more effort by Saudi Arabia to increase supply, as agreed at recent international summits. At least an additional 1.9 million barrels of oil per day is expected soon.

The inflationary effects of speculation may also go into reverse. In a recent research paper, the Treasury predicted that "several factors point to a possible falling back in prices towards the end of 2008".

Some economists are now suggesting that the very worst predictions of recession may be avoided. Ruth Lea, economic adviser to Arbuthnot Banking Group, commented: "Providing commodity prices continue to ease, inflation is kept under control, and the credit markets improve over the next year, growth should resume next year, albeit modestly."