Inflation Watchers: Keep an Eye on Commodities

Bob Johnson: There are four key drivers to inflation: monetary policy, fiscal policy, the output gap, and commodities. This week's chart focuses on those commodities. This broad-based index of commodities includes energy, it includes food, and it includes metals. So, it's very broad-based. You can see between 2000-08 this, accelerated very sharply as China developed and put more money in infrastructure, driving up many commodities.

In addition, all the additional income in China created a need for more food, and that also moved up the index as well. So, we had this sharp rise in the inflation. That came to an abrupt halt in 2008 as world economies all headed into a recession at the same time. This briefly drove down prices. However, they came bounding back as China continued to spend throughout the recession and focused on infrastructure as well as in the agricultural sector where some droughts pushed prices sharply higher through 2011.

From 2011, commodity prices began to fall again as China moved to a consumption-based economy from one based on industrial commodities, and that sharply slowed inflation in commodities. That combined with the fact that some of the droughts broke around the world and food prices moved down as well. And also the European recession held things back as well. So, we had the situation where commodities were down for basically four or five years in a row. We think that pattern has begun to bottom. And actually, some prices had begun to move back up again.

We're watching these trends very closely to determine whether commodities will again boom and be an issue for inflation in the years ahead.