Abstract

This study examines the relationship between changes in commodity prices and changes in inflation in Canada between 1983 and 2008 by looking at the ability of the Bank of Canada Commodity Price Indices to predict changes in the Consumer Price Index. It is found that indices with energy components lead changes in inflation but only for the latter half of the sample period, 1996-2008. Other suspected leading indicators of inflation, such as the money supply, the foreign exchange rate, the housing index, interest rates, and the price of gold, do not change the relationship or its strength. The positive correlation between commodity prices and inflation is further supported by a decomposition of the mean real returns on portfolios into months in which a four-month moving average of the Bank of Canada Commodity Price Index signals a rising price level and those which do not, the mean real return being substantially higher in the signal-on months.