The Link Between Higher Commodity Prices and Inflation

have surged—some, like steel and lumber, to recordhigh levels. The figure shows 12-month percent changes in four well-known commodity price indexes. Although down from their peaks earlier this year, the average of the four indexes through August is up by about 38 percent from a year earlier. The linkage between commodity price changes and the changes in prices that consumers pay for goods and services is intuitive: If the price of steel increases, consumers will pay more for durable goods such as motor vehicles and appliances, which will tend to lift the measure of inflation that the Fed targets (the personal consumption expenditures price index, or PCEPI). So, perhaps not surprisingly, the surge in commodity prices has occurred in tandem with higher consumer price inflation. In July, the PCEPI rose 4.2 percent from 12 months earlier, which was the largest 12-month increase since January 1991. However, as many Federal Reserve officials have stressed, higher inflation this year also reflects other factors generally not related to rising commodity prices.1 In particular, the challenges stemming from the pandemic appear to be key factors. The pandemic was a global event that triggered The Link Between Higher Commodity Prices and Inflation