Commodity prices and inflation risk. (20th December 2021)

• Record Type: Journal Article
• Authors: Garratt, Anthony; Petrella, Ivan
• Is Part Of: Journal of applied econometrics. Volume 37:Number 2(2022)
• Page Start: 392
• Page End: 414
• Publication Date: 2021-12-20
• Subjects: Inflation risk -- Convenience yields -- Spot commodity prices -- Model averaging -- Probability events -- Balance of risks and inflation uncertainty; Econometrics -- Periodicals; 330.015195
• DOI: 10.1002/jae.2868
• Languages: English
• ISSNs: 0883-7252

Abstract

Summary: This paper investigates the role of commodity price information when evaluating inflation risk. Using a model averaging approach, we provide strong evidence of in‐sample and out‐of‐sample predictive ability from commodity prices and convenience yields to inflation, establishing clear point and density forecast performance gains when incorporating disaggregated commodities price information. The resulting forecast densities are used to calculate the (ex‐ante) risk of inflation breaching defined thresholds that broadly characterize periods of high and low inflation. We find that information in commodity prices significantly enhances our ability to pick out tail inflation events and to characterize the level of risks associated with periods of high volatility in commodity prices.