Infocus - Commodity prices and inflation in developed and emerging economies

Many commentators expect inflation to increase after years of being below central banks’ objectives. Rising commodity prices, from oil to agricultural goods, underpin these fears. In this edition of Infocus, GianLuigi Mandruzzato looks at the transmission of commodity price shocks to inflation in developed and emerging countries.

The rise in government bond yields since the beginning of the year is, for many observers, a sign of an imminent increase in inflation. After having declined gradually since the early 1980s, low inflation became entrenched after the Global Financial Crisis, but its reversal may now have begun. In support of this view, some emerging countries, such as Brazil, Russia, and Turkey have already seen inflation rise and their central banks have reacted by raising interest rates.

Factors behind the rise in inflation include the exceptional policy measures undertaken by central banks and governments to combat the Covid pandemic and the strong economic recovery that is underway (see Figure 1a) which has (as has been the case in recent years) been associated with rising commodity prices (see Figure 1b).

1a - Global recovery underway

1b - Commodity prices indices

How important are commodity prices for consumer prices? With a few exceptions such as some energy goods and fresh food, raw materials are not sold directly to consumers. Rather, commodities are inputs into manufactured goods that are eventually purchased by households. However, other factors, including the costs of labour and capital and taxation are more important than raw materials in setting the final selling price.

The consumption of non-essential goods and services is higher in wealthier economies, reducing the importance of food and energy purchases in total consumption. This suggests that the impact of commodity price shocks on inflation declines with the level of income and should therefore lower in developed than in emerging economies.

To assess the impact of commodity price shocks on inflation, it is useful to start from the composition of consumer price indices (CPI) in emerging and developed economies.¹ The composition of the CPI baskets reflects consumers’ expenditure, as measured by sample surveys among households and are updated annually.

The median weight of food in the 2021 CPI basket, based on 2020 consumption, is about seven percentage points higher in emerging than in developed economies (see Figure 2a). 

2a. Food median weights in CPI baskets

The weight of groceries has fallen since 2000 by about 2 percentage points in both groups. The rebound of the weight of food purchases in the 2021 CPI in developed countries is due to the collapse of non-primary consumption following the restrictions imposed to contain the pandemic. Figure 2b shows that the weight of food expenditure in the CPI baskets is inversely correlated to the level of per capita income across both developed and emerging economies, supporting the view that increased per capita income explains the structural decline in the weight of food purchases in CPI baskets seen in the last two decades. 

2b. Income and food weight in CPI baskets

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Footnotes

1 The analysis considers data from 24 developed and 20 emerging economies. The group of developed economies includes: Australia, Austria, Belgium, Canada, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Japan, Latvia, Lithuania, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, UK, and US.. Emerging economies group includes: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Kazakhstan, Mexico, Poland, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, and Turkey

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