Commodity Prices and Inflation

There is a new Paper out by Frank Browne and David Cronin which is a prime Read for Those interested in the origins of Inflation. I must first state I do not find their thesis any more compelling than my own expectation: which is the interaction of Supply Shocks and Speculation overshoot Commodity prices in a fluid market, and that Consumer prices (much stickier in movement) overcompensate in Price shifts to stay in the Black. We both agree that the basic bulk of Inflation derives through interaction of a fluid Commodities market and a very sticky Consumer Price market set basically solely by Producers. The Later will always overcompensate in setting their Prices with inclusion of the full speculation of the Commodities market.

The type of Price stickiness of the Consumer market stands as highly relevant in the impact of Commodity Pricing on Consumer Pricing. Consumer prices are likely to rise far more rapidly than they are likely to fall. Supply Shocks in the Commodity market resound in the Consumer pricing far more quickly than do Oversupply reductions in Commodity prices. In fact, Consumer prices express almost complete resistence to Price reductions below previous Consumer pricing before the expressed previous Supply Shocks, ignoring any Oversupply in the Commodities market, and assuming the difference as Business Profits.

The previous analysis presents primary theory (which has not been checked within a data framework), but seems sufficiently relevant to conduct further analysis into the de facto Stickiness of Inflation itself. Readers, who think I am talking out of my hat, may be able to understand that Inflation is a common occurrence happening normally in an Economy; while since the organization of the central Banking systems, deflation occurs only relatively infrequently with short duration, and only in circumstances of rapid Unemployment, severe Commodity shortages, or major changes in Currency. The depth of the deflation due to the severity of the economic conditions causing it, gives real Inflation control (light deflation) a bad name. I have long been speculating on how to induce a slight deflation (believing this venue would cure far more than injure). lgl