"This next chart
shows inflation-adjusted value of the broader Spot Commodity Index, which adds
foodstuffs to the Raw Industrials Index. One thing that stands out is that,
despite huge gains since 2001, most commodity prices today are lower in real
terms than they were in 1970—on average, commodity prices have risen by less
than the rate of inflation for over 40 years. Commodities rose in real terms in
the 1970s (after being largely flat throughout the 1960s), a period during
which monetary policy was generally accommodative, inflation was rising, and
there was lots of speculative purchasing of commodities and other physical
assets for their inflation-hedging properties.
Commodities fell significantly in the 1980s and 1990s, when monetary policy was generally tight and inflation was falling. The Fed began to ease in 2001, and commodity prices have risen significantly since then, suggesting that—as was the case in the 1970s—monetary policy has played a significant role in driving prices higher in the past decade. From this perspective, it would appear that the Fed's policy accommodation over the past decade has been enough to remove the deflationary impact that monetary policy had on commodity prices in the 1980s and 1990s, but not enough to create new inflationary pressures."
