Dollar industrial commodity prices fell by 8% during May but are still up by 15% from six months ago, as measured by the Journal of Commerce index, covering 18 materials used in manufacturing production including crude oil and natural gas.

The six-month rate of change of commodity prices continues to correlate closely with that of industrial output in seven large emerging economies (the "E7") – see first chart. This relationship suggests that 1) the recovery in commodity prices since early 2009 has been driven by "fundamentals" rather than speculation and 2) prices will rise further unless E7 six-month output growth slows to below about 3%, or 6% annualised.

Such an output slowdown, meanwhile, is unlikely while E7 real narrow money, M1, continues to expand strongly – second chart.