Commodity Prices and the U.S. Price Level

Abstract

Commodity Prices and t he U. S. Price Level AN IMPORTANT ASPECT of the recent high rates of inflation in both the United States and other countries has been the sharp increases in prices of raw commodities. To be sure, prices of primary industrial products usually have risen significantly during cyclical upswings, particularly during the phase when output is accelerating. Prices of raw agricultural commodities are also responsive to demand to some degree, although their most striking movements are usually induced by changes in supply. That the recent advance in raw commodity prices was one of the largest experienced in the United States is generally attributed to two factors: (1) the coincidence of the general business expansion in the United States with a reduction in the supply of some major agricultural products; and (2) the coincidence of the acceleration in general business expansions in the United States and other countries. The purpose of this paper is to explore the impact of this worldwide surge in the prices of raw commodities on the price level in the United States in 1973.1 The analysis uses an econometric model of price behavior by stage of process. Note: Lydia Segal and Rosemary Quintano assisted in the research for this paper. The author is solely responsible for the views expressed and any errors of analysis.1. Such an analysis assumes that the rise in raw commodity prices, in the short run at least, affects the overall price level and not merely relative prices. Specifically, it assumes that overall prices are not completely determined by the supply of money in the short run. 249

On the prevalence of trends in primary commodity prices

“…Many studies have emphasized the existence of multiple turning points in commodity prices including Popkin (1974), Cooper and Lawrence (1975), Enoch and Panic (1981), Bosworth and Lawrence (1982) and Chu and Morrison (1984). Therefore, in an extension to the work of Leon and Soto (1997), this study provides new evidence by applying the Lumsdaine and Papell (1997) unit root test that allows for two shifts in the mean and trend under the alternative hypothesis to individual commodity prices in an extended 1900-1998 As a further extension of previous work in this area, we note that there is substantial serial correlation observed in many commodity prices.…”

The curious relationship between agricultural and energy price index: A Vector Error Correction Model (VECM) analysis approach

“…They are primarily traced to a poor harvest, decreasing stocks and unfavorable world trade (Joerin & Joerin, 2013). During 1973, in the US, agricultural exports, consumption decreased signi icantly than the production share (Popkin, 1974). The unknown causes for the erratic price movement in 1973 were attributed to speculation or in lation-hedging demand for commodities.…”

The Common Fund

“…This acceleration in the rate of American inflation could be traced to a number of factors, but "arithmetically the primary stimulus came from the near-explosion in the retail prices of food and the prices of internationally traded commodities" following worldwide demand and low inventories for food and other primary commodities (Shapiro, 1977, p.281). Popkin (1974) estimated that a 14.5 per cent increase in the price of non-food and non-fuel raw materials caused a 1 per cent increase in the consumer price index of the United States (Waelbroeck, 1976). And Behrman rightly holds that this is an under-estimate of the likely impact of change of world commodity prices on American inflation in that it takes into account the effect of the proportion of commodities which are produced only in the developing world.…”