Commodity Prices and Inflation: Evidence From Seven Large Industrial Countries
James M. Boughton
William H. Branson
This paper examines the relationships between movements in primary
commodity prices and changes in inflation in the large industrial countries.
It begins by developing a two-country model in order to examine the theoretical
effects of monetary, fiscal, and supply-side diturbances on commodity and
manufactures prices and on exchange rates. It is shown that if monetary shocks
dominate, then commodity prices should lead general price movements, and the
level of commodity prices should be correlated with the general inflation rate.
Non-monetary shocks generally weaken these relationships, but such disturbances
may cancel out for broad indexes covering a wide range of commodities.
Country-specific commodity price indexes are developed for the major
industrial countries. The weights assigned to different commodities vary
substantially across countries. Nonetheless, when the indexes are expressed in
a common currency, they tend to be highly correlated over time, except when
sharp movements occur in certain commodity prices. The major source of
contrast across countries in the behavior of the indexes derives from exchange
Several empirical tests broadly support the conclusions of the theoretical
model, with relatively few differences across countries. Three main tendencies
may be cited. First, low inflation in industrial countries has tended to be
associated with low levels of commodity prices, and conversely; commodity-price
levels are cointegrated with consumer-price inflation rates. Second, there has
been some tendency for movements in commodity prices to precede changes in
general inflation rates by a few months, although it is not clear whether this
tendency is strong enough to be a reliable aid in forecasting the rate of
inflation. Third, there is a strong and fairly reliable tendency for turning
points in general inflation rates. Commodity prices thus appear to contribute
to predictions of turning points in inflation, predictions of inflation rates
but more strongly to predictions of turning points in inflation.
In order to set up a list of libraries that you have access to,
you must first login
or sign up.
Then set up a personal list of libraries from your profile page by
clicking on your user name at the top right of any screen.