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Will higher commodity prices lead to more inflation?

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See Commodity Price Surges Add to Inflation Fears: Higher prices for commodities are flowing through to more companies and consumers, making it harder for central bankers to ignore them by Tom Fairless, Alistair MacDonald and Jesse Newman of The WSJ. Excerpts: "Commodities generally make up a relatively small part of consumer prices. They are mainly used for producing goods as opposed to services, which are a bigger part of developed-world economies. Goods make up about 20% of the weighting of the U.S. consumer-price index. Academic work also suggests that the impact of commodity-price shocks on inflation has fallen in recent decades, as elements such as branding have become important in final costs. Kevin Kliesen, a business economist at

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See Commodity Price Surges Add to Inflation Fears: Higher prices for commodities are flowing through to more companies and consumers, making it harder for central bankers to ignore them by Tom Fairless, Alistair MacDonald and Jesse Newman of The WSJ. Excerpts: 

"Commodities generally make up a relatively small part of consumer prices. They are mainly used for producing goods as opposed to services, which are a bigger part of developed-world economies. Goods make up about 20% of the weighting of the U.S. consumer-price index.

Academic work also suggests that the impact of commodity-price shocks on inflation has fallen in recent decades, as elements such as branding have become important in final costs. Kevin Kliesen, a business economist at the Federal Reserve Bank of St. Louis, recently found there was a fairly small correlation between the costs of an index composed of industrial materials and one looking at prices for durable goods.

Commodities also have come to play a smaller role in final production as businesses become more efficient, according to research by economists at the Federal Reserve Bank of New York. The U.S. roughly tripled its economic output per kilogram of oil consumed between 1990 and 2015, according to the World Bank.

“Oil used to be important enough to swing inflation [see the high inflation rates of the 1970s in the table below], but now no commodity is,” said Dirk Schumacher, a former ECB economist now at Natixis."

"Economists note that some commodity prices, notably crude oil, are merely returning to pre-pandemic levels. Recent sharp increases are built on comparisons with mid-2020, when consumption was depressed due to the pandemic.

Many also believe commodity-price growth will subside later this year as some U.S. consumer spending shifts to services, which are less commodity-intensive. Chinese consumption of industrial metals, which is about half of global demand, is expected to fall as Beijing reins in credit growth, according to Capital Economics.

“Oil has gone from $35 to $70 [a barrel It’s not going to rise to $140,” said Dan Smith, special adviser at Oxford Economics in London. “A lot of commodity prices will go broadly sideways for the next three to six months.”

Michael Hanson, senior global economist at JPMorgan Chase Bank, says that while higher prices for raw materials will probably result in temporary inflation pressures, it won’t make much of a dent in the U.S. economy.

Much of the recent inflation uptick is due to the frenzied nature of the economy’s reopening, with firms scrambling to find workers and resolve freight bottlenecks, he said, and the economy is strong enough to weather it.

The commodity boom also has winners: It is creating a windfall for farmers and agribusinesses, lifting prices for U.S. farmland and benefiting commodity-exporting nations."

This table shows the average, high and low inflation rates for the last several decades:

Decade

AVG

HIGH

LOW

1950s

2.25%

6.00%

-0.70%

1960s

2.53%

6.20%

0.70%

1970s

7.41%

13.30%

3.30%

1980s

5.14%

12.50%

1.10%

1990s

2.92%

6.10%

1.60%

2000s

2.54%

4.10%

0.10%

2010s

1.76%

3.00%

0.70%

 

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