Effects of Commodity Price Shocks on Inflation: A Cross-Country Analysis

Since the 2000s, large fluctuations in commodity prices have become a concern among
policymakers regarding price stability. This paper investigates the effects of commodity
price shocks on headline inflation with a monthly panel consisting of 144 countries. We
find that the effects of commodity price shocks on inflation virtually disappear within
about one year after the shock. While the effect on the level of consumer prices varies
across countries, this transitory effect is fairly robust, suggesting a low risk of a
persistent second-round effect on inflation. Employing the smooth transition
autoregressive models that use past inflation as the transition variable, we also explore
the possibility that the effect of commodity price shocks could be persistent, depending
on inflation regimes. In this specification, commodity price shocks may not have
transitory effects when a country's currency is pegged to the U.S. dollar. However, the
effect remains transitory in countries with exchange-rate flexibility.