## Volatile Commodity Prices Reduce Growth and Amplify Swings in Inflation

_IMF Blog, March 28, 2023_

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## Bibliographic details
- Authors: Adil Mohommad, Mehdi Raissi, Kyuho Lee, Chanpheng Fizzarotti
- Published: March 28, 2023

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### Key findings
- Resurgent volatility in commodity markets will likely pose economic challenges in coming years even as prices decline.
- Volatility in commodity terms of trade—movement in prices a country pays for commodity imports and receives for commodity exports—affects economic growth and inflation.
- Volatility can weigh on long-term economic growth, especially for commodity exporters, by inducing greater volatility in government finances and leading to stop-start public investment that undermines physical and human capital investment.
- Volatility in commodity prices appears to increase the volatility of domestic inflation over the medium term through pass-through from imported goods to consumer prices.

### Recent price movements and impacts
- World food commodity prices rose nearly 40 percent in the two years just before Russia’s invasion of Ukraine.
- Wheat prices jumped 38 percent in March 2022 from a month earlier.
- Natural gas prices in Europe tripled.
- High energy prices fed into record prices of commonly used fertilizers for food production.
- While international food and energy prices have moderated since their recent peak, they nonetheless remain elevated and have contributed to higher consumer prices and global economic hardship.
- The World Food Programme estimates that 345 million people in almost 80 countries will face acute food insecurity this year—more than double the number in 2020.

### Channels of transmission
- For commodity exporters: volatility induces fiscal revenue swings, which can lead to irregular public investment and weaker accumulation of physical and human capital, lowering potential growth.
- For domestic inflation: greater volatility in imported commodity prices can pass through into domestic prices, increasing consumer inflation volatility.

### Policy recommendations
- Monetary policy must remain focused on bringing inflation down.
- Fiscal policy should aim for gradual and steady tightening to reduce pressure on monetary policy while supporting the most vulnerable.
- Costly broad-based policies to mitigate higher commodity prices, such as price subsidies to limit pass-through to domestic prices, should be unwound and replaced by targeted measures to support vulnerable households.
  - Unwinding broad subsidies helps avoid distortions that delay adjustments to higher energy prices.
  - It preserves incentives for development of alternative green energy sources and supports fiscal sustainability.
  - It improves distributional outcomes since energy subsidies tend to also benefit richer households.
- Strengthen macro-fiscal institutions that can buffer commodity price volatility to minimize longer-lasting adverse effects.

### Multilateral and trade priorities
- Domestic actions should be complemented by multilateral efforts to address food and energy insecurity.
- It is vital to sustain open trade in food.
- Free flow of trade in metal and mineral inputs critical for the green transition would support energy security.

*IMF Blog — Adil Mohommad, Mehdi Raissi, Kyuho Lee, Chanpheng Fizzarotti, March 28, 2023*

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## References

- [a new report](https://www.imf.org/external/np/g20/032823.htm)
- [remain elevated](https://www.imf.org/en/Blogs/Articles/2023/03/09/global-food-crisis-may-persist-with-prices-still-elevated-after-year-of-war)

_Source: https://www.imf.org/en/blogs/articles/2023/03/28/volatile-commodity-prices-reduce-growth-and-amplify-swings-in-inflation_