Chapter 3. IS INFLATION BACK? COMMODITY PRICES AND INFLATION
- International Monetary Fund. Research Dept.
- Published Date:
- October 2008
This chapter examines the current commodity price boom and evaluates the risks that the associated relative price adjustment could ratchet up inflation, as during the 1970s. Despite some recent easing in commodity prices, many of the forces underlying the boom are still in place, and prices will likely remain at high levels by historical standards. Continuing inflation risks arise from the large increases in commodity prices that have not fed fully through the supply chain. Most vulnerable to risks of a ratcheting up in inflation are those economies with a high likelihood of second-round effects—where commodities account for a large share of final expenditure and where monetary policy has only limited credibility, where there are price pressures from other sources such as overheating, and where the macroeconomic policy response to rising inflation has been inadequate.