Inflation & Commodity Prices
The U.S. Bureau of Labor Statistics latest figures show the Consumer Price Index is up 9.1 percent over the previous 12 months ending in June. At the same time, corn and soybean prices were testing record highs earlier this year before falling back in recent weeks. The correlation this year between inflation and commodity prices makes one wonder whether there’s a linkage. Research by agricultural economists at the University of Illinois led by Gary Schnitkey casts doubt on the idea.
The Illinois researchers looked at nearly 60 years of inflation and corn and soybean price history to examine a possible linkage. The researchers found small, positive correlations between inflation and corn and soybean prices, meaning inflation and commodity prices tend to move in the same direction. However, estimates produced correlation coefficients of 0.19 between corn price and inflation and 0.11 between soybean price and inflation. A coefficient of 0 indicates no correlation between prices and inflation and a coefficient of 1 indicates a perfect correlation. The small, positive coefficients indicate a positive linkage, but the linkage is very weak. In contrast, the researchers found a high correlation between corn and soybean prices over time, with a correlation coefficient of 0.94, meaning they are nearly perfectly correlated.
The economists argue other factors like export demand, ethanol production, and supply shocks contribute much more to commodity prices compared to inflation. The bottom line is any linkage between inflation and commodity prices is tenuous. Thus, high inflation rates do not signal a continuing period of high commodity prices, or vice versa.
Figure 1. Corn Prices vs. Inflation Rate