Commodity prices and inflation risk

Abstract

This paper investigates the role of commodity price information when evaluating inflation risk. Using a model averaging approach, we provide strong evidence of in-sample and out-of-sample predictive ability from commodity prices and convenience yields to inflation, establishing clear point and density forecast performance gains when incorporating disaggregated commodities price information. The resulting forecast densities are used to calculate the (ex-ante) risk of inflation breaching defined thresholds that broadly characterise periods of high and low inflation. We find that information in commodity prices significantly enhances our ability to pick out tail inflation events and to characterise the level of risks associated with periods of high volatility in commodity prices.

Are Agricultural Commodity Prices on a Conventional Wisdom with Inflation?

“…The p values point out that there is no significant interrelationship between ACP and INF, suggesting that ACP cannot affect INF, and vice versa. These are not supported by the previous studies (Garratt & Petrella, 2019; Goudarzi et al, 2012; Irawati et al, 2019), and also inconsistent with Hypotheses 1 and 2.…”

“…First, prior studies explore the relationship between ACP and INF. There is sufficient evidence to point out the positive effect of ACP on INF, that is, the increase in ACP is the Granger cause of INF (Balcilar & Bekun, 2020; Garratt & Petrella, 2019; Gelos & Ustyugova, 2017; Irawati et al, 2019; Okorie & Ohakwe, 2018; Tule et al, 2019). Less literature explores the influence of INF on ACP (Akpan & Udoh, 2009; Goudarzi et al, 2012; Guloglu & Nazlioglu, 2013; Taslimi et al, 2012; Ukoha, 2008), indicating that INF can significantly and positively affect ACP.…”

“…It has become a consensus that rise in ACP is likely to cause INF (Irawati et al, 2019). As agricultural commodities are key inputs in the production process of many goods, changes in ACP are reflected in the marginal cost of production, that is ultimately transmitted to the aggregate price level (Garratt & Petrella, 2019). INF is a sustained rise in the general price level, which is often being considered as a measure of overall macroeconomic situation and uncertainty (Taslimi et al, 2012).…”

Commodity tail risks

“…Tail risks in commodity markets are also important for countries whose exports mainly rely on commodities. Moreover, commodity markets, and especially tail events, have a large influence on inflation and consumer spending (Garratt & Petrella, 2019). Thus an understanding of tail risks in commodity markets is crucial to understanding movements in the cross‐section of commodity market returns and overall extreme risks in the market.…”

Understanding fluctuations through Multivariate Circulant Singular Spectrum Analysis

“…The evolution of energy prices impact other non-energy primary commodities [4], exchange rates [5] and inflation [6], among others. Not only energy prices affect economic activity but are also influenced by it (as [7,8] show for general commodity prices), being one of the main determinants of the real price of commodity shifts in the demand for commodities associated with unexpected fluctuations linked to the business cycle.…”