Effects of Commodity Price Shocks on Inflation: A Cross-Country Analysis

Abstract

Since the 2000s, large fluctuations in commodity prices have become a concern among policymakers regarding price stability. This paper investigates the effects of commodity price shocks on headline inflation with a monthly panel consisting of 144 countries. We find that the effects of commodity price shocks on inflation virtually disappear within about one year after the shock. While the effect on the level of consumer prices varies across countries, this transitory effect is fairly robust, suggesting a low risk of a persistent second-round effect on inflation. Employing the smooth transition autoregressive models that use past inflation as the transition variable, we also explore the possibility that the effect of commodity price shocks could be persistent, depending on inflation regimes. In this specification, commodity price shocks may not have transitory effects when a country’s currency is pegged to the U.S. dollar. However, the effect remains transitory in countries with exchange-rate flexibility.