Commodity Prices as Predictors of Aggregate Price Change

Abstract

Many analysts have advocated using commodity prices as a guide for monetary policy. The basic reasoning can be simply put: “Money creation is intended to promote price stability and is best guided by an index of prices set in real markets.” (Wall Street Journal, 1988). The rationale for stabilizing commodity prices can also be expressed in three propositions. First, inflation is a monetary phenomenon that should be eliminated. Second, commodity prices are determined in auction markets; they will therefore change quickly in response to monetary policy actions. Third, changes in commodity prices are good predictors of future aggregate price change. If all three propositions are accepted, then commodity prices might well be a useful guide for monetary policy, possibly serving as an intermediate target or at least as an important indicator variable.

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