World Commodity Prices as a Forecasting Tool for Retail Prices: Evidence From the United Kingdom

IMF Working Papers, June 1, 1997

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Objective: Investigate whether a stable long-run co-movement exists between world commodity prices and U.K. retail prices, and whether short-run changes in commodity prices convey information about future movements in U.K. retail prices.
Methods: Cointegration and Granger-causality techniques.
Main conclusion: The results show noncointegration and no unidirectional Granger causality from commodity to retail prices.
Implication: Little may be gained from using developments in commodity prices to forecast movements in retail prices in the inflation-targeting framework followed by the U.K. monetary authorities.

Noncointegration between world commodity prices and U.K. retail prices.
No unidirectional Granger causality from commodity prices to retail prices.
These empirical findings suggest limited forecasting value of commodity price developments for U.K. retail price movements within the U.K.’s inflation-targeting framework.

Cointegration analysis applied to assess long-run co-movement.
Granger-causality tests applied to assess information content of short-run commodity price changes for future retail price movements.
Use of standard econometric terminology as reported: "cointegration", "Granger-causality technique", "Granger-causality test", "error-correction term".

For monetary authorities in the U.K. operating under an inflation-targeting framework: reliance on world commodity price developments for forecasting retail inflation appears to offer limited benefit based on the study’s results.
Suggests prioritizing other indicators or models for short- and long-run retail price forecasting in the U.K. context.