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Lower Income Households’ Vulnerability to the Recent Commodity Price Surge
In a previous post, I discussed the impact of changing commodity prices on the discretionary income of households and concluded that these effects generally were relatively modest except in cases of extreme swings in commodity prices. As many people know, there was a large surge in energy prices during the first quarter of 2011, and it appears to have had a significant effect on discretionary income and consumer spending. (See recent speeches by Federal Reserve Chairman Bernanke and New York Fed President Dudley; for views outside the Fed, see FT Alphaville, Tim Duy, and James Hamilton.)
Broker-dealer risk appetite and commodity returns
This paper shows that the risk-bearing capacity of U.S. securities brokers and dealers is a strong determinant of risk premia in commodity derivatives markets. Commodity derivatives are the principal instrument used by producers and purchasers of commodities to hedge against commodity price risk. Broker-dealers play an important role in this hedging process because commodity derivatives are traded primarily over the counter. I capture the limits of arbitrage in this market in a simple asset pricing model where producers and purchasers of commodities share risk with broker-dealers who are ...
What Tracks Commodity Prices?
Various news reports have asserted that the slowdown in China was a key factor driving down commodity prices in 2015. It is true that China’s growth eased last year and, owing to its manufacturing-intensive economy, that slackening could reasonably have had repercussions for commodity prices. Still, growth in Japan and Europe accelerated in 2015, with the net result that global growth was fairly steady last year, casting doubt on the China slowdown explanation. An alternative story relies on the strong correlation between the dollar and commodity prices over time. A simple regression shows ...
How Easy Is It to Forecast Commodity Prices?
Over the last decade, unprecedented spikes and drops in commodity prices have been a recurrent source of concern to both policymakers and the general public. Given all the recent attention, have economists and analysts made any progress in their ability to predict movements in commodity prices? In this post, we find there is no easy answer. We consider different strategies to forecast near-term commodity price inflation, but find that no particular approach is systematically more accurate and robust. Additionally, the results warn against interpreting current forecasts of commodity prices ...
Monetary policy surprises, positions of traders, and changes in commodity futures prices
Using futures data for the period 1990?2008, this paper finds evidence that expansionary monetary policy surprises tend to increase crude and heating oil prices, and contractionary monetary policy shocks increase gold and platinum prices. Our analysis uncovers substantial heterogeneity in the magnitude of this response to positive and negative surprises across different commodities and commodity groups. The results also suggest that the positions of futures traders for the metals and energy commodities strongly respond to monetary policy shocks. The adjustment of the net long positions of ...
The Link Between Higher Commodity Prices and Inflation
Price indexes with a larger energy component—such as the Bloomberg and Goldman Sachs–Standard & Poor’s—are more highly correlated with headline inflation.
Do Households Expect Inflation When Commodities Surge?
Household surveys indicate that consumers expect higher inflation this year than in recent years, as the U.S. economy rebounds from the deep recession. This has coincided with a surge in commodity prices, as strong demand for goods like gas, food, and construction materials is catching producers with low supplies. Evidence suggests that households respond to commodity price increases by raising their expectations of future inflation. However, since surges in commodity prices are transitory, their effects on inflation expectations—particularly long-term expectations—are modest and ...