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Informing the public about the Federal Reserve
What are the causes of recent increases in the prices of some commodities, such as gasoline?
Early this year, we saw significant increases in some highly visible prices, including the prices of crude oil and other commodities. Higher oil prices over this period appear to have reflected rising geopolitical tensions between Iran, OPEC's second-largest producer of crude oil, and the U.S. and Europe. Moreover, these tensions occurred against a backdrop of significant ongoing disruptions to the global supply of oil due to unrest in the Middle East and North Africa.
More broadly, higher commodity prices in recent years have largely reflected rising global demand for raw materials, particularly in some fast-growing emerging market economies, while the global supply of these materials, in many cases, has been constrained. More recently, global demand appears to have decelerated, and many commodity prices have fallen back somewhat. Notably, commodity prices have moved similarly in terms of all major currencies, which suggests that changes in the foreign exchange value of the U.S. dollar are unlikely to have been an important driver of the price changes seen in recent months.
Changes in consumer energy prices have largely tracked swings in prices of crude oil; in particular, gasoline prices rose noticeably in 2011 and early this year but have begun to decline recently as crude oil prices have moved down. Though high gasoline prices continue to create hardship for American households, the effect of commodity price increases on broad indexes of U.S. consumer prices has been quite low in recent decades, partly reflecting the relatively small weight of materials inputs in total production costs, as well as the stability of longer-term inflation expectations. Currently, cost pressures from high commodity prices are also being offset by the stability in unit labor costs. Thus, while these earlier increases in commodity prices contributed to a relatively modest pickup in U.S. consumer price inflation, this boost to inflation is likely to be temporary--an outlook consistent with the projections of both Federal Reserve policymakers and most private forecasters. That said, sustained increases in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability, particularly if they were to cause inflation expectations to become less well anchored. The Federal Reserve will continue to monitor these developments closely and is prepared to respond as necessary to best support the ongoing economic recovery in a context of price stability.
