How To Forecast Commodity Prices

Considering different strategies to forecast near-term commodity price inflation, no particular approach is systematically more accurate and robust. Even more, current forecasts of commodity prices upswings are unreliable signals of future inflationary pressure.

Federal Reserve Chairman Ben Bernanke has emphasized the importance of both forecasting commodity price changes and understanding the factors that drive those changes. At the time inflationary pressures were very much on the minds of monetary policymakers across the globe. Oil prices accelerated and more than doubled in the following quarters. Food prices rose by about 50 percent over the same time horizon.

“Information from large panels of global economic variables can help, but not overwhelming”, say Jan Groen and Paolo Pesenti of the Federal Reserve Bank of New York . “It depends on the choice of the index and the horizon. There is some evidence for the notion that commodity currencies are useful predictors.”

The basic message is one of inconclusiveness. No easy generalization or pattern emerges, and the results look almost random. “We were unable to generate forecasts that are on average more accurate and robust than those based on autoregressive or random walk specifications.”

“If a policy lesson can be drawn from our results, it is that one should be very cautious when interpreting the forecast of a forthcoming commodity price surge as an early signal of recrudescence in global headline inflation.”

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