Nonlinear Features of Comovements Between Commodity Prices and Inflation

Abstract

This paper attempts to investigate further the nonlinear feedback relationship found in Kyrtsou and Labys (2006) between US inflation (BLS CPI) and primary commodity price index (the BLS PPI component for all primary commodity series). Our goal is to disaggregate the above index to the individual commodity level for a group of raw materials prices, including crude oil. Assuming the hypothesis that a non-linear feedback relationship exists between US inflation and the commodity price index, we examine if individual primary commodity prices also nonlinearly causes inflation and vice-versa. We also improve upon our previous research by employing a new test for non-linear feedback causality recently developed by Hristu-Varsakelis and Kyrtsou (2006). Our results suggest the presence of non-linear interdependences between inflation and the various commodity price series, and particularly bi-directionality in the case of crude oil.