In the fall of last year, when world financial markets had virtually seized up in the wake of the Russian government's partial default on its debt, the U.S. economy got a big boost just when it needed it most: a plunge in world commodity prices gave American consumers and businesses the equivalent of a substantial tax cut.

A huge drop in crude oil prices, for example, cut fuel costs for motorists, truckers and airlines. Households and businesses that use oil for heating--or for more specialized uses such as chemical plant feedstocks--saw their costs fall sharply. But prices of many other items, such as aluminum and copper, were also weak.

More recently, oil prices have soared to their highest levels since 1990, after last year's price weakness spurred the Organization of Petroleum Exporting Countries to curb production. Some other prices have risen as well, and the combination has caused some analysts and policymakers to worry that a generalized increase in commodity prices could be the harbinger of an increase in the nation's very low inflation rate.

However, as shown in the the accompanying chart of changes in the Journal of Commerce's index of industrial commodities, the rebound has been quite limited, with yesterday's level of 94.3 hardly higher than in mid-July.

"What has happened is that you have got a bounce off the bottom," said Bill Dudley, chief economist at Goldman Sachs & Co. in New York. "That sort of recovery is almost inevitable."

The Journal of Commerce index, which tracks 17 industrial commodities--among them petroleum, several metals, textiles, plywood and cotton--rose very rapidly during 1994, when U.S. economic growth began to surge. The Federal Reserve, which had kept its target for overnight interest rates at only 3 percent to encourage just such growth, raised that target repeatedly to try to keep inflation under control. The rapid increase in commodity prices raised fears that the Fed had kept rates too low too long and inflation was getting out of hand.

In fact, growth slowed again in the first half of 1995, commodity prices peaked and the prices consumers pay not only didn't go up, they declined slightly. Furthermore, the big run-up in industrial commodity prices didn't seem even to have much effect on the prices manufacturers charged for finished goods when they were first sold.

How could that happen?

For one thing, the cost of raw materials typically represents a very small share of a firm's total costs. Roughly 70 percent of an average business' costs are for labor, with the remainder divided among materials, interest, property and sales taxes, and the like. Obviously, each industry's mix of costs is different, and in some cases, such as petroleum refining, a commodity cost can play a dominant role in what's charged for its output.

But in the highly competitive U.S. economy of recent years, firms have found many ways to become more efficient and offset the impact of unavoidable cost increases--including changes in manufacturing processes to reduce consumption of raw materials. And until the first wave of financial turmoil hit several East Asian countries in 1997, worldwide capacity for producing many commodities had been rising so rapidly that some analysts were wondering whether demand would increase fast enough to make such investments pay off.

The economies of several of the hard-hit countries, including South Korea and Thailand, have rebounded, Japan appears to be growing once again, albeit at a very slow pace, and growth is picking up in Europe as well. All that suggests stronger demand for a wide range of commodities, another reason some analysts find even the limited rebound in their prices troubling.

Nevertheless, a lot of the capacity that has come on line in recent years is still there. Indeed, as prices strengthen, some factories that had been shut down are operating again, which may serve to limit future increases.

As Dudley of Goldman Sachs put it, "Commodity prices have no persistence. If they go up today, that is no indication they will go up tomorrow."

Or one could simply say they are volatile. Take the price of 1,000 square feet of plywood, one of the components of the Journal of Commerce index. From the spring of 1993 to last spring, that price bounced up and down from a low of about $275 to a high of $400. In June it skyrocketed, and it topped $500 in July. By September, however, it was back in its previous trading range.

Aside from oil--which is a big aside, admittedly--steel is about the only one of the 17 industrial commodities in the Journal of Commerce index whose price hasn't turned flat or down relatively recently. Some, such as cotton, print cloth and polyester cloth, never turned up.

In any event, 1999 clearly hasn't been a repeat of 1994. One factor undoubtedly is that there are few if any production bottlenecks in the economy. There have been some shortages of construction materials but not of much else. And the share of manufacturing production capacity actually in use is well below its 1994 level.

"The real question is, 'Will the commodity price increases we have seen in the past year factor into wages?' " Dudley said. "Changes in commodity prices do have a big impact in inflation headlines" and that could affect workers' willingness to accept more modest wage increases, he said.

Last year, those headlines showed falling inflation rates, particularly because of the sharp decline in a price widely noticed by the public, the price of gasoline at the pump. Did that affect wages? Dudley thinks it may have.

"That gave you some good news on wages last year. Now that could go the other way," he said.

CAPTION: COMMODITY PRICES HAVE REBOUNDED

(This graphic was not available)