April 11th, 2011
Econintersect: A Chicago Federal Reserve study suggests that commodity price increases do not require a monetary policy response to fight inflation from the Federal Reserve. The study concluded:
Moreover, at least in the case of oil, price increases tend to slow the economy even without any policy rate increases. Of course, if commodity and energy prices were to lead to a general expectation of a broader increase in inflation, more substantial policy rate increases would be justified. But assuming there is a generally high degree of central-bank credibility, there is no reason for such expectations to develop—in fact, in the post-Volcker period, there have been no signs that they typically do. Follow up:
In simple words, commodity price increases slow the economy in turn forcing down commodity prices. This correlates with a Bank of Tokyo Mitsubishi UFJ report which states:
Taking a look at historical data back to the 1970’s and relating the energy component of the consumer price index to growth in real consumer spending we can see that a 10 percent annualized growth rate in the 3-month moving average of the CPI for energy appears to be a trigger for a pullback in spending.
Currently, the CPI energy price index is up 10% suggesting a consumer pullback may be underway. Econintersect has produced a study for release this weekend showing recessions in the past triggered by rising commodity prices.
The concern of rising prices is not only inflation, but also recessing the economy.
source: Federal Reserve