## 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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## Bibliographic details
- Authors: John Thornton, Alicia García-Herrero
- Published: June 1, 1997
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451960471.001

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### Summary
- 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.

### Key Findings
- 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.

### Methods and Techniques
- 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".

### Policy Implications
- 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.

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