Commodity price pass-through and inflation regimes

Does an increase in the energy and commodity prices drive consumer prices? The energy and commodity markets affect the inflation process through international trade. This poses policy implications for monetary policy to forecast inflation and also smooth the impact of international relative price movements. We investigate the pass-through of a broad range of agricultural and energy commodity prices to inflation across different inflation regimes. Our distinctive regime-varying methodology captures asymmetric response of inflation to the world commodity prices. We establish the first evidence of the pass-through of commodity prices to inflation across different periods of low and high inflation regimes and also stable and unstable inflation regimes. The results show that the duration of staying in an unstable inflation regime is smaller in the commodity markets. Both short-run and long-run pass-through of agricultural, food and energy commodities are higher compared to other commodities. The energy commodity particularly drives the inflation process for advanced economies, emerging economies and also the European Union countries. Overall, the dynamics of inflation and commodity prices change in the inflation environment, pointing to implications for conducting optimal monetary policy.