The Federal Reserve Bank of New York today released Commodity Price Movements and PCE Inflation, the latest article in its series Current Issues in Economics and Finance. Author Bart Hobijn concludes that the effects of crop and energy price movements on U.S. inflation are more modest than one might expect.
Using data on inter-industry purchases and sales, Hobijn calculates the contribution that changes in the price of crops and oil and gas made to the personal consumption expenditures (PCE) index of U.S. inflation from June 2006 to June 2008. The author finds that slightly less than half of the growth in the PCE, and just less than a third of the growth in the core index (which excludes food and fuel), can be attributed to escalating crop and energy prices. Hobijn suggests that these effects are fairly modest, especially in light of the common perception that rising fuel prices drive inflation in other goods and services.
The author also studies the effect of swings in the price of crops and energy on the price of specific goods and services bought by U.S. consumers. Here, he finds that commodity price increases affect relatively few goods prices: higher crop prices translate narrowly into price hikes for food, tobacco and gardening supplies, while rising oil prices mainly influence fuel, energy and transportation prices. Therefore, if higher prices are observed in core consumer goods and services, other inflationary pressures are undoubtedly at work.
Hobijn explains that while the second half of 2008 is seeing a sharp reversal of the rise in oil and grain prices took place during the two- year period examined in this study, the effects of declines in commodity prices would be calculated in the same way and should have a proportional effect on inflation.
Bart Hobijn is a research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco; he was a research officer in the Macroeconomic and Monetary Studies Function of the Federal Reserve Bank of New York when the article was written.