https://doi.org/10.52903/wp2024334
UNPACKING COMMODITY PRICE FLUCTUATIONS: READING THE NEWS TO UNDERSTAND INFLATION
Dimitris Malliaropulos
University of Piraeus and Bank of Greece
Evgenia Passari
Université Paris-Dauphine
Filippos Petroulakis
Bank of Greece
ABSTRACT
We show that text-based indicators of supply and demand disturbances in commodity markets provide distinct information about future inflation movements relative to existing predictors, inflation expectations and survey forecasts. Specifically, we document that demand-side disturbances play a significantly larger role in prediction because they typically lead to uniform increases in quantities and prices of goods across the consumer basket, resulting in a clear and positive relationship between commodity prices and overall inflation. Supply-side disturbances matter in particular circumstances, for instance during the recent period of the pandemic and geopolitical shocks. In terms of magnitudes, the commodity-specific indicators reduce out-of-sample inflation forecast errors by up to 30 percent. We finally apply our indexes to the inflation decomposition framework of Blanchard and Bernanke (2023) and corroborate their finding that the bulk of pandemic-era inflation can be attributed to commodity supply disruptions, resulting in price increases in goods markets.
JEL-classifications: C19, E31, E37, Q02
Keywords: inflation, commodities, news, textual analysis, demand, supply
Disclaimer: : The views expressed in this paper are those of the authors and not necessarily those of the Bank of Greece. The authors thank George-Marios Angeletos, Gadi Barlevy, Francesco Bianchi, Ryan Charhour, Raffaella Giacomini, Yuriy Gorodnichenko, François Gourio, Refet Gürkaynak, Matteo Iacoviello, Michele Lenza, Andrei Levchenko, Francesca Monti, Dimitris Papanikolaou, Pascal Paul, Giorgio Primiceri, Ricardo Reis, Hélène Rey, Alexander Richter, and the participants of the Sciences Po - OFCE - Banque de France - CEPR Workshop on Empirical Monetary Economics 2023, the 2024 AEA session “New Developments in the Study of Inflation Origins and Inflation Dynamics”, the 31st CEPR European Summer Symposium in International Macroeconomics (ESSIM), and the PSE Macro Days 2024 for comments and discussions. Evgenia Passari gratefully acknowledges financial support from the Europlace Institute of Finance (EIF) & the Labex Louis Bachelier, and hospitality from the Kellogg School of Management, Northwestern University, the Federal Reserve Bank of Chicago and the Kiel Institute of the World Economy where this research was partly conducted
Correspondence:
Filippos Petroulakis
Economic Analysis and Research Department
Bank of Greece
El.Venizelos 21, 10250 Athens, Greece
Tel.: +30-2103202416
email: fpetroulakis@bankofgreece.gr