The Link between Commodity Price Changes and Inflation

What is the link between changes in commodity prices and changes in consumer prices? A recent Economic Synopses essay explored this relationship and found that changes in commodity price indexes—particularly those with a larger energy component—appear to be highly correlated with headline inflation.

Author Kevin Kliesen, a business economist and research officer at the St. Louis Fed, examined simple correlations between changes in commodity price indexes and measures of consumer price inflation from January 1995 to December 2019.

“Reporting correlations during the nearly 25-year period prior to the pandemic might be a better gauge of the comovement between key measures of consumer price inflation and changes in commodity prices if the pandemic effects are temporary,” he wrote.

Commodity Price Indexes and Inflation Measures

Kliesen looked at four well-known commodity price indexes and six measures of personal consumption expenditures price index (PCEPI) inflation.

The commodity price indexes he included in his analysis and the energy weight in each one are listed in the table below.

The measures of PCEPI inflation that Kliesen used are:

• Headline inflation, which includes all items
• Durable goods inflation
• Nondurable goods inflation
• Services inflation
• Core inflation, which excludes food and energy
• Trimmed-mean inflation rate from the Dallas Fed

Correlations between Commodity Price Changes and Inflation

The table below shows the average correlation that Kliesen found between changes in the four commodity price indexes and each of the six inflation measures. His analysis used 12-month percent changes in the price indexes.

Kliesen highlighted four key takeaways from his analysis. The first is that changes in commodity prices are highly correlated with headline PCEPI inflation, with the average correlation being 0.70, he noted.

Second, he found that the commodity price indexes with a larger energy component are more highly correlated with headline PCEPI inflation than those with a smaller energy component. In particular, the correlations were 0.79 for the Bloomberg index and 0.83 for S&P GSCI, compared with 0.58 for FIBER and 0.59 for CRB.

A third takeaway is that among the types of PCE products, commodity price changes had the highest average correlation with nondurable goods inflation (0.70) and the lowest with durable goods inflation (0.14), he noted. “Energy also helps explain this finding, because rising oil prices are usually quickly passed through to consumers in the form of higher gasoline prices,” he wrote.

The fourth takeaway is related to core inflation. The average correlation between commodity price changes and core PCEPI inflation was 0.47, which is much weaker than for headline inflation, he found. Furthermore, the correlation between commodity price changes and the trimmed-mean inflation rate averaged just 0.06.

“The main takeaway from this analysis is that commodity prices that have a relatively high energy component are more highly correlated with headline inflation than those commodity price indexes composed mostly of metals or agricultural commodities,” Kliesen wrote.