The Commodity–Consumer Price Connection: Fact or Fable?

Interest in commodity prices as indicators of consumerprice inflation has ebbed and flowed withthe rise and fall in commodity prices themselves.True to form, as commodity prices have surged inthe last two years (Chart 1), interest in their predictivepower has returned. Inflation hawks point to an outpouringof studies in the late 1980s showing a strong empiricalconnection between commodity prices and subsequentconsumer inflation. Indeed, the concern over commoditieshas grown to the point where even two previously obscurecommodity indexes—the National Association of PurchasingManagers price index (NAPM) and the Federal ReserveBank of Philadelphia’s prices paid index (PHIL)—havebegun to capture considerable attention among economistsand market analysts.[...]