Are World Commodity Prices Relevant in Predicting Inflation in Botswana?

The causal relationship between world commodity prices and inflation has been investigated in numerous empirical studies with no clear cut consensus. The key issue in the debate is whether changes in commodity prices can be used to predict the future path of consumer prices. Using a Vector Error Correction Model (VECM), this study seeks to provide empirical evidence on the relevance of world commodity prices in predicting inflation focusing on Botswana, a small open economy that is heavily dependent on the import and export of primary commodities. The results revealed the existence of long run relationships between commodity prices indices and headline inflation in Botswana. The main implication of the findings of this study is that world commodity prices could play an informational role in the conduct of monetary policy in Botswana.