Monetary Policy Transmission through Commodity Prices

IMF Working Papers, October 10, 2023

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Authors: Jorge Alberto Miranda Pinto, Andrea Pescatori, Ervin Prifti, Guillermo Verduzco-Bustos
Published: October 10, 2023
Series: IMF Working Papers
DOI: https://doi.org/10.5089/9798400256691.001

Monetary policy influences inflation dynamics by exerting impact on a diverse array of commodity prices.
At high frequencies, a 10 basis points increase in US monetary policy rate reduces commodity prices between 0.5% and 2.5%, after 18 to 24 business days.
Over longer horizons (6-36 months), the response of commodity prices—oil, base metals, and food prices—to monetary policy accounts for 47% of the total effect of US monetary policy on US headline inflation, and 57% of the effect of US monetary policy on other countries’ headline inflation.
The commodity price channel on core inflation is smaller and mainly driven by base metal prices.
The commodity-price channel of ECB monetary policy is smaller than the US channel and mainly operates through its effect on energy prices.

Shock size: 10 basis points increase in US monetary policy rate.
Timing: effects observed after 18 to 24 business days.
Magnitude: commodity prices decline between 0.5% and 2.5% in response to the shock.
Channels: effects go beyond the dollar appreciation channel; they are larger for highly storable and industrial commodities, consistent with the cost of carry and the expected demand channel.

Contribution to headline inflation:
- 47% of the total effect of US monetary policy on US headline inflation is accounted for by the response of commodity prices (oil, base metals, and food prices).
- 57% of the effect of US monetary policy on other countries’ headline inflation is accounted for by the response of commodity prices.
Core inflation: the commodity-price channel on core inflation is smaller compared with headline inflation and is mainly driven by base metal prices.

Oil, base metals, and food prices are the key commodity groups transmitting US monetary policy to headline inflation.
Base metal prices are the principal driver of the commodity-price channel's effect on core inflation.
Highly storable and industrial commodities exhibit larger responses to monetary policy shocks, consistent with the cost of carry and expected demand mechanisms.
ECB monetary policy transmits to prices mainly through energy prices, with a smaller overall commodity-price channel compared with US monetary policy.