Commodities, inflation and monetary policy: a global perspective

Over the past year, the issue of rising commodity prices has attracted growing interest and raised concern at international level owing to its macroeconomic (the rise in inflation and impact on the economy), social (redistribution effect) and, indeed, geopolitical repercussions. This article briefly describes developments in commodity prices with an emphasis on food, reviews the reasons behind these developments and assesses the short and medium-term outlook, before focusing on the macroeconomic implications. It looks, in particular, at the potential impact of rising commodity prices on inflation and monetary policy in a global context marked by considerable uncertainty and the slowdown in some of the biggest economies. The analysis is geared towards emerging economies for the following reasons: first, they are, in theory, more exposed to the inflationary impact of an increase in commodity prices; second, the anti-inflation credibility of their monetary authorities is, in general, less anchored than in the advanced economies; and lastly, the monetary policy conduct is complicated in some countries by rigid exchange rate regimes and/or as a result of their status as exporters of commodities. The same reasons dictate that emerging countries are likely to run a greater risk of a deterioration in inflation expectations. Furthermore, the rise in commodity prices has greater social implications in emerging countries and requires a more active policy response by the economic authorities. The prominence of emerging countries in the global economy is ever greater and they have so far displayed relative resilience to the effects of the financial turmoil and the slowdown in the advanced economies. Consequently, they are proving instrumental in maintaining the dynamism of the global economy. This means that their response to the increase in global inflationary pressures transcends their borders and also has global implications.