Lumber, corn and copper prices have been jumping this year. Future prices of all kinds of commodities have been rallying, including coffee, wheat and oil. It’s supply and demand, yes, but also the inflation trade.
Commodity prices are commonly thought to be a barometer of inflation since they are important raw materials used by industries and consumers alike. Higher prices at the beginning of the global supply chain result in higher prices at the end, right?
The predictive power of commodity prices is not as powerful as one may think reading the headlines. In 1995, research from the Federal Reserve Bank of New York found “the diminished signaling power of commodities.” It echoed a 1994 study from the Fed’s St. Louis branch finding long-term discrepancies between the direction of commodity prices and consumer prices.
Why all this interest in commodity prices and inflation in the 1990s? Well, prices were rising sharply, the economy was accelerating after a recession and interest rates were starting to rise from historic lows for that time. But consumer inflation remained tame during that decade thanks to several factors including globalization, worker productivity and an increase in the labor pool.