The Bank for International Settlements published a BIS Bulletin assessing the macroeconomic effects of commodity price fluctuations and central banks’ historical policy responses, drawing lessons from the 2021–22 surge in energy and food prices. It argues that the recent, largely supply-driven commodity price increases materially raised the risk of a shift to a high-inflation regime, which was averted only after unusually intense and synchronous monetary tightening, and warns that future shocks could become harder to “look through” without jeopardising price stability. The Bulletin distinguishes between demand- and supply-driven commodity price shifts, finding that demand-driven increases raise both headline and core inflation while supporting industrial production, whereas supply-driven increases are stagflationary, lowering output and raising inflation. Large supply-driven energy shocks have disproportionate and longer-lasting effects on inflation, and the impact is amplified when inflation is already above target and in economies where food and energy carry higher weights in production and consumption; differences between commodity exporters and importers also matter via terms-of-trade and exchange rate channels. Using Taylor-rule estimates that separate core inflation from energy and food components, it finds that major advanced economy central banks have generally responded to core inflation while largely ignoring direct energy and food price changes, whereas emerging market economy central banks tend to respond more strongly to food and energy prices, consistent with less well anchored inflation expectations; these patterns were reflected in a faster post-pandemic tightening in EMEs than in AEs. Looking ahead, it highlights risks that geopolitical disruptions, climate change, decarbonisation-related scarcities (including metals for the green transition), and higher energy demand from artificial intelligence could make commodity price surges larger, more frequent and more persistent amid less elastic global supply and greater pricing power for firms and workers. In that environment, the Bulletin cautions that central banks would need to be more careful about looking through commodity-driven inflation and notes that proposals to increase tolerance for commodity price surges, including by raising inflation targets or adopting a target range with a higher upper bound, could erode credibility and trust in price stability mandates.
Bank for International Settlements 2025-01-08
Bank for International Settlements examines how larger and more persistent commodity price shocks could constrain monetary policy look-through
The Bank for International Settlements' BIS Bulletin analyzes the macroeconomic effects of commodity price fluctuations and central banks' responses, especially during the 2021–22 energy and food price surge. It highlights supply-driven price increases as a risk for high inflation, mitigated by intense monetary tightening, and warns of future challenges from geopolitical and climate disruptions. The Bulletin advises caution against increasing tolerance for commodity-driven inflation, as it could undermine central banks' credibility in maintaining price stability.