G-20 Conference on Commodity Price Volatility Istanbul, September 13, 2011 Commodity Price Booms, the Global Economy, and Low-income Countries Thomas Helbling Research Department International Monetary Fund

Commodity Price Indices (2005=100, in constant U.S. dollars) Commodity Prices Remain High 1 Note: The IMF Equal Weight Index is based on 33 fuel and nonfuel commodities with prices in the IMF’s PCPS that date back to January The CRB Spot Price index is published by the Commodity Research Bureau and covers non-fuel commodities only. Sources: IMF, Primary Commodity Price System; Commodity Research Bureau; and Haver Analytics. Prices of many commodities are close to or even above recent peaks, but generally are below the levels prevailing in the 1970s and early 1980s.

Roadmap Lessons for Price Volatility from Current Commodity Price Boom Impact on the Global Economy and Low- income Countries Policy Implications 2

Commodity Price Volatility (Standard deviation based on monthly log changes in percent, rolling 24-month window) Commodity Price Spikes and Volatility 3 Note: The volatility series is a simple average of the standard deviations of the components of the IMF Equal Weight Price Index in constant U.S. dollars. Changes and deviations in percent based on quarterly data. Trend deviations derived with BK filter. Sources: IMF, Primary Commodity Price System; and Haver Analytics. Commodity price volatility tends to increase during price spikes but not necessarily during booms. Commodity Price Changes and Deviations from Trend

Crude Oil Prices Oil and Wheat Price Volatility 4 Note: Conditional standard deviations (times 100) implied by an AR(1) model of the first difference in real prices in natural logarithms with a GARCH structure for the error variance. Lag length determined with AIC criterion. Sources: IMF, Primary Commodity Price System; and Haver Analytics. Volatility patterns in individual commodity prices show similar patterns. Conditional wheat price volatility increased by relatively more in the price spike and has stayed above average. Wheat Prices

Commodity Price Indices (2005=100, in constant U.S. dollars, in logs, deviations from mean) Commodity Prices on An Upward Trend 5 Note: The IMF Equal Weight Index is based on 33 fuel and nonfuel commodities with prices in the IMF’s PCPS that date back to January The CRB Spot Price index is published by the Commodity Research Bureau and covers non-fuel commodities only. Sources: IMF, Primary Commodity Price System; Commodity Research Bureau; and Haver Analytics. After declining through the 1980s and 1990s, broad commodity price indices have been rising since early The timing broadly corresponds with the turnaround in the trend component.

Change in Global Supply and Demand Projections in / (percent) Global Grain Inventories-to-Consumption, / (percent) Weather Shocks were Catalyst for Food Price Surge 6 Sources: U.S. Department of Agriculture (USDA); and IMF staff calculations. 1/ USDA projections for the international crop year 2010/11. 2/ End-year inventories as a percent of consumption, with USDA projections for average Weather-related supply effects should unwind with the new crop season and food prices should retreat modestly through Upside price risks from low inventories remains a concern.

Commodity Price Volatility (In percent) Commodity Volatility for Price Levels and Changes 7 Note: The volatility series are based on the standard deviations of the components of the IMF Equal Weight Price Index in constant U.S. dollars. Sources: IMF, Primary Commodity Price System; and Haver Analytics. The volatility of commodity price changes is the relevant metric for assessing price formation and the growth or inflation impact. But short-term level volatility is a concern for areas such as fiscal policy, external financing, and poverty. Level volatility has not yet “normalized.”

Output and Inflation in Advanced Economies (Output deviations from trend in percent; inflation deviations from average in percent) Stagflation in the 1970s, Cycle in the 2000s 8 Note: Output deviations are based on linear trend with average growth of the prior 10 years. Inflation deviations are from average rate during the prior 10 years. In emerging and developing economies windows for averages in 1970s are 8 years. Sources: IMF, World Economic Outlook Database. Smaller shocks, better monetary policy, greater labor market flexibility, and smaller expenditure shares have underpinned a smaller adverse impact of commodity price increases over the past decade. Output and Inflation in Emerging and Developing Economies (Output deviations from trend in percent; inflation deviations from average in percent)

Food Expenditure Shares Vary with Per-Capita Incomes 9 Source: IMF, World Economic Outlook; and IMF staff estimates. Household’s food expenditure shares are a key parameter determining the macroeconomic effects of food price spikes. The relationship below suggests that macroeconomic risks from rising food prices are inversely related to per capita incomes.

Output in Low-income Countries (Annual change in real GDP in percent) Damage to LICs also Surprisingly Benign 10 Sources: IMF, World Economic Outlook Database. The broad macroeconomic impact on LICs has also been surprisingly benign, notably for inflation. But the poverty impact has been substantial, and price spikes create fiscal and BOP risks. Inflation in Low-Income Countries (Annual change in CPI in percent)

Policy Implications Demand and supply shocks could be less benign. Policy buffers in LICs have not been rebuilt. Risks Better monetary policy frameworks; first-round (and possibly 2 nd round) accommodation help to lower impact. Policy trade-offs can still be present Social safety nets and fiscal policy. Macroeconomic policies Multilateral policies 11 Trade policy and other disruptive policy interventions Making markets work better through more information Ensure market integrity at a time of structural change and globalizing markets Emergency financing and stocks.

Thank you.

Annual Growth of Oil Demand (contributions; percent) Oil Demand Growth Accelerated in 2010H2 Sources: International Energy Agency; IMF, World Economic Outlook; and IMF staff calculations. 13 Total oil demand World GDP Global oil demand increases in 2010 were well above those of recent years.

Wide Variation in Commodity Terms of Trade Changes 14 First-round Impact of Recent International Commodity Price Changes on Trade Balances 1/ (April 2011 WEO forecast over October 2010 WEO forecast; 2011 trade balance in percent of 2009 GDP) Source: IMF staff calculations. 1/ Country export and import weights by commodities are derived from trade data for 2005–08. Total The recent changes in commodity terms of trade have led to rising inflation in many countries, but their impact on cyclical positions has varied between commodity exporters and importers.