Takayuki TsurugaBack to index

  • Effects of Commodity Price Shocks on Inflation:A Cross-Country Analysis


    Since 2000s, large fluctuations in non-energy commodity prices have become a concern among policymakers about price stability. Using local projections, this paper investigates the effects of commodity price shocks on inflation. We estimate impulse responses of the consumer price indexes (CPIs) to commodity price shocks from a monthly panel consisting of 120 countries. Our analyses show that the effects of commodity price shocks on inflation are transitory. While the effect on the level of consumer prices varies across countries, the transitory effects on inflation are fairly robust, suggesting that policymakers may not need to pay special attention to the recent fluctuation in non-energy commodity prices. Employing the smooth transition autoregessive models that use the past inflation rate as the transition variable, we also explore the possibility that the effect of commodity price shocks is influenced by the inflation regimes. In this specification, commodity prices may not have transitory effects when a country is less developed and its currency is pegged to the U.S. dollar. However, the effect remains transitory in developed countries with exchange rate flexibility.


    Fluctuations in the non-energy commodity prices since the early 2000s have renewed policymakers’ attention to their effects on inflation. One of the issues for policymakers is how monetary policy should respond to the commodity price shocks. Among others, Yellen (2011) argues that commodity price shocks have only modest and transitory effects on U.S. inflation and that a recent surge of commodity prices does not “warrant any substantial shift in the stance of monetary policy.” On the other hand, European Central Bank (2008) and International Monetary Fund (2008) express some concerns about the upside risks to price stability due to rising inflation expectations triggered by commodity price shocks.