Academic journal article Monthly Labor Review

Impact of Commodity Price Movements on CPI Inflation

Academic journal article Monthly Labor Review

Impact of Commodity Price Movements on CPI Inflation

Article excerpt

An analysis of price movements of four commodities--crops, animal slaughter and processing, dairy, and oil and gas--reveals that only oil and gas prices had a considerable impact on CPI inflation; thus, even large increases in the prices of the first three of these commodities do not necessarily contribute substantially to inflation.

A worldwide surge in commodity prices that began in late 2006 and ended in mid-2008 generated interest in studying the effects of commodity price movements on consumer prices. During this period, prices for commodity crops nearly doubled while prices for oil and natural gas more than doubled. In a recent article, Bart Hobijn of the Federal Reserve Bank explored the relationship between commodity price changes (for crops, oil, and natural gas) and changes in inflation as measured by the Bureau of Economic Analysis (BEA).1 Hobijn analyzed BEA's Personal Consumption Expenditures (PCE) Price Indexes from June 2006 through June 2008, to determine the extent to which commodity price swings affected the price of final consumer goods. Hobijn found that the commodity price increases translated into larger price increases in the United States only for those goods most closely related to the commodities in question. The contribution of the price surges to overall inflation was less pronounced.

Building upon Hobijn's work, this article explores the effects of price changes in four commodity groups (crops, animal slaughter and processing, dairy, and oil and natural gas) on the Bureau of Labor Statistics (BLS, the Bureau) Consumer Price Index (CPI) for various final goods, and on overall CPI consumer inflation, from 2003 through 2008. Although the increases in crop and oil prices, and in natural gas prices, during the years 2006 through 2008 were relatively high, the prices of these commodities exhibited noticeable highs and extreme volatility several years prior to Hobijn's analysis. Numerous factors drove commodity price volatility during this earlier period, the most important of which were fundamental changes to supply and demand, speculative market trading, exchange rate fluctuations, and political conflicts in key producing regions of the globe.

The analysis presented here produces findings similar to Hobijn's. In general, despite large runups in commodity prices, the effects on overall rates of CPI inflation were relatively modest, although certain CPI categories were heavily influenced by the price movements of the commodities examined. In the shorter periods with particularly dramatic price movements, the results were similar: the impact on overall inflation was still relatively modest, whereas the impact of commodity prices was more pronounced on those CPI indexes which were closely related to the commodities. However, unlike Hobijn's piece, this article finds that oil and gas commodity price movements had an appreciable impact on overall CPI inflation, as well as on the lower level indexes, both in the longer term and in specific years.

The article is divided into three main sections. The first section outlines the methodology employed to conduct the analysis, describes the modified Leontief model used to calculate the importance of different commodities for the production of final goods, and discusses both the underlying assumptions of the study and some of its inherent limitations. The second section delineates the components of the four commodity aggregates used in the analysis. The last section examines the major price movements of each commodity aggregate and their impact on several measures of CPI inflation.

Methodology

The analysis that follows examines input-output data in combination with commodity price index data to estimate price transmission from commodity prices to various consumer price indexes. Input-output data are used to compute the input shares of commodities for different consumer goods. Input shares indicate the percentage of value of a final good, or a set of final goods, that can be attributed to a specific input commodity or to a set of input commodities. …

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