Managing Inflation in an Era of Commodity Price Volatility

Joint seminar with International Monetary Fund and Reserve Bank of India

03 May 2013 (4:00 pm-5:30 pm, Hall 8, Room 1)

Commodity price movements have been erratic in recent years. Prices for rice, wheat, and palm oil surged sharply in 2007–2008—to nearly double their level at the beginning of the millennium—falling back sharply in 2009 as the food crisis abated. This reversion proved to be short-lived, with food prices spiking again in mid-2010 and mid-2012. Oil prices too rose sharply in this period, with price of Brent crude hitting nearly $150 per barrel in July 2008 before falling back sharply. Although not currently increasing, long-term trends in inflation-adjusted commodity prices suggest the commodity boom is not yet over. The sharp movements in commodity prices have made it difficult for central bankers to achieve price stability, as these relative price movements get built into people’s inflationary expectations. For India, food price movements have been a particular problem.

The panel will explore issues such as the pass through of commodity prices to general inflation, what central banks must consider about commodity price volatility when adjusting monetary policy, and whether to target core or headline inflation to guide monetary policy.

Pass through to inflation. Commodity price shocks have been an important driver of inflation dynamics in Asia, with cross-country evidence showing the relative importance of first and second round effects. Yet the effects are not uniform across all countries. Potential reasons for a differentiated pass through include differences in exposure to commodity shocks, the credibility of policy frameworks, cyclical conditions, and price stabilization mechanisms.

Commodity price volatility and monetary policy. Volatile global commodity prices raise a variety of questions for monetary authorities.

  • Are spillovers to domestic inflation transitory or permanent?
  • Should central banks respond to commodity price volatility or will their actions only aggravate the situation?
  • Does the financialization of global commodity markets have implications for financial market stability?
  • Are commodity price movements making exchange rates—and therefore financial markets—more volatile?

Core versus headline inflation. There is an active debate on which measure of inflation central banks should target. Targeting core inflation can avoid importing instability into monetary policy from possible volatile movements in headline inflation. Yet headline inflation affects the actual prices that households face, and hence is easier to communicate. Countries in emerging Asia are typically characterized with high shares of food and energy in their consumption basket and aggressive fiscal interventions to respond to spikes in international commodity prices.

Given these peculiarities, their non-core components of inflation tend to be more persistent than their core. Under these conditions, which approach is more appropriate for the region?

Closing Remarks:

Takehiko Nakao
President, ADB

Panelists:

Subir Gokarn
Director, Research Brookings India

Klaus Regling
Managing Director, European Stability Mechanism

Changyong Rhee
Chief Economist, ADB

Anoop Singh
Director of the Asia and Pacific Department, IMF

Naoyuki Shinohara
Deputy Managing Director, IMF

Moderator: Nik Gowing
International Journalist and Broadcaster