Monetary Policy, Inflation and Commodity Prices

Frank Browne and David Cronin

The interaction between commodity prices, general inflation and monetary policy has re-emerged in recent years as a topic of interest among academic economists, central bankers and financial market participants alike. A sustained, broadly based increase in commodity prices started in the mid 2000s, and rising prices have also been evident in other major asset classes (stocks, bonds, property). These price increases occurred against a monetary policy stance, in the major advanced industrial countries, that was viewed as broadly accommodating in many quarters at that time, and as being appropriate given that general inflation rates, eg, consumer price index (CPI) inflation rates, were relatively low, and within or close to targets set for, or by, central banks. Moreover, rising commodity prices were not seen as having any substantial impact on consumer prices.

Most asset prices started to decline in late 2007. Commodity prices fell rapidly and steeply in the second half of 2008. Ironically, this occurred against a background of policy interest rates being reduced to close to zero, and an unconventional monetary policy tool, quantitative easing, being introduced by the main