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Commodity Prices, Monetary Policy, and Inflation†

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  • José De Gregorio

Abstract

During the second half of the 2000s, the world experienced a rapid and substantial rise in commodity prices. This shock posed complex challenges for monetary policy, in particular because of the significant increase in food and energy prices, and the repercussions they had on aggregate inflation measures. This paper discusses the role of commodity price shocks (CPS) in monetary policy in the light of recent episodes of such shocks. It begins by discussing whether monetary policy should target core or headline inflation, and what should be the role of CPS in setting interest rates. It is argued that there are good reasons to focus on headline inflation, as most central banks actually do. Although core inflation provides a good indicator of underlying inflation pressures, the evolution of commodity prices should not be overlooked, because of pervasive second-round effects. This paper reviews the evidence on the rise of inflation across countries and reports that food inflation, more than energy inflation, has relevant propagation effects on core inflation. This finding is particularly important in emerging market economies, where the share of food in the consumer basket is significant. The evidence also shows that countries that had lower inflation during the run up of commodity prices before the global crisis had more inflation in the subsequent rise after the global crisis, suggesting that part of the precrisis inflationary success may have been because of repressed inflation. This paper also discusses other factors that may explain different inflationary performances across countries.

Suggested Citation

  • José De Gregorio, 2012. "Commodity Prices, Monetary Policy, and Inflation†," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(4), pages 600-633, December.
  • Handle: RePEc:pal:imfecr:v:60:y:2012:i:4:p:600-633
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    References listed on IDEAS

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    Cited by:

    1. Christian Dreger & Malte Rieth & David Pothier, 2015. "Is Globalization Reducing the Ability of Central Banks to Control Inflation? In-Depth Analysis," DIW Berlin: Politikberatung kompakt, DIW Berlin, German Institute for Economic Research, volume 106, number pbk106.
    2. John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses," Koç University-TUSIAD Economic Research Forum Working Papers 1504, Koc University-TUSIAD Economic Research Forum.
    3. Javier G. Gómez-Pineda, 2016. "Commodity Price Fluctuations, Core Inflation and Policy Interest Rates," Borradores de Economia 967, Banco de la Republica de Colombia.
    4. repec:nov:artigo:v:27:y:2017:i:1:p:173-207 is not listed on IDEAS
    5. Atsushi Sekine & Takayuki Tsuruga, 2014. "Effects of Commodity Price Shocks on Inflation:A Cross-Country Analysis," UTokyo Price Project Working Paper Series 038, University of Tokyo, Graduate School of Economics.
    6. Luis A V Catão, 2014. "Comments on Andrew Filardo and Marco Lombardi's paper," BIS Papers chapters,in: Bank for International Settlements (ed.), Globalisation, inflation and monetary policy in Asia and the Pacific, volume 77, pages 155-158 Bank for International Settlements.
    7. Mariana Papatulicǎ & Petre Prisecaru, 2016. "Will Low Crude Oil Prices Cause a Global Recession?," Global Economic Observer, "Nicolae Titulescu" University of Bucharest, Faculty of Economic Sciences;Institute for World Economy of the Romanian Academy, vol. 4(1), pages 107-116, May.
    8. Bentour, El Mostafa, 2015. "On the removal of energy products subsidies in an importing oil country: impacts on prices in Morocco," MPRA Paper 63635, University Library of Munich, Germany.
    9. Marcel Förster & Peter Tillmann, 2014. "Reconsidering the International Comovement of Inflation," Open Economies Review, Springer, vol. 25(5), pages 841-863, November.

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