Commodity Price Increases Do Not Create Inflation

Commodity Price Increases Do Not Create Inflation

Share to Linkedin My previous column – "The Inflation Scare Does Not Match Reality" – drew a lot of pushback from readers who cited recent large price increases for a wide range of basic commodities, as a sign of inflationary pressure just around the corner. On the surface, it looks bad. Commodity prices are way up. The media is on alert. Inflation worries have dominated the headlines for months. (This weekend even Warren Buffett joined the outcry: "Buffett Warns on Inflation Amid Red Hot US Recovery" - The Financial Times, May 3.) And isn't it obvious? Don't rising prices constitute inflation by definition? The answer is No. Commodity prices and consumer inflation are quite different phenomena. The idea that commodity price increases will drive up consumer prices is plausible – but it is incorrect. Basic commodity prices no longer have any significant effect on long-term inflation. In fact, over the past 10 years, the correlation of major commodity prices and consumer price inflation is negative (except for crude oil, which is only slightly positive). Over the long term rising commodity prices have been associated with falling inflation rates. This statement holds whether we look at broad trends or at individual