Commodity Price Inflation

Econbrowser has an interesting analysis on the recent, average commodity appreciation of 34%. This graph, which is from a recent paper by Ke Tang and Wei Xiong, has certainly resonated with me:

Why the correlation between certain commodity prices and oil? It is important to note that the correlation uses a rolling sample beginning one year before indicated date of returns on oil versus commodities. Unlike popular belief that currency devaluation is driving the recent commodity boom, rising oil prices is the major driver for commodity inflation.

The paper also believes that commodity inflation have been caused by commodities becoming a popular investment vehicle. However, I believe that is simply a consequence of rising world demand. If the former is true, then we would have another bubble in store. If the latter is believed, then we would expect worldwide inflation. Depending which comes first, both may be in the same feedback loop, so unfortunately, both would create a vicious cycle where as one increases, the other follows.

One would think that an increase in rates would immediately fix this.  But, that may be premature.  If oil is the big driver, then what is really needed is substitution away from oil.  Could lithium become the next commodity to drive commodity price inflation after a huge electric car boom takes charge during another oil shock? What other alternatives are there? Tax fuel for all non-commercial vehicles (electric or not)?


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