Text-based demand indicators for energy, metals, agricultural commodities and livestock share a common component that strongly correlates with the business cycle, consistent with inflationary, aggregate demand dynamics. More work coming out soon, stay tuned! 13/n

To mitigate this challenge, we employ the narrative-based indicators of Mouabbi, Passari, and Rousset Planat (2024), that use textual analysis on business news to build supply and demand-side proxies of shocks for a big number of commodities. 12/n

Although the literature has provided us with reliable measures of shocks for the oil market, the price drivers of other commodities remain understudied. 11/n

Meanwhile, commodities such as coffee, which are imperfect substitutes for cocoa, may see limited demand effects, remaining relatively insulated from price changes. 10/n

For instance, a negative supply shock in the cocoa market may elevate cocoa prices while exerting downward pressure on the price of sugar, given their complementary nature in consumption. 9/n

Conversely, supply shocks that are idiosyncratic to specific commodities can generate varying effects on the general price level, depending on the interplay between substitute and complementary goods: 8/n

Under the presence of aggregate demand shocks, that affect most sectors of the economy homogeneously, the relationship between commodity prices and inflation tends to be unambiguous, reflecting substantial passthrough effects, leading to a strong link with inflation dynamics. 7/n

Commodities provide distinct information about future inflation relative to existing predictors, inflation expectations and survey forecasts, but the predictive power of commodity prices is obscured by the different passthrough of supply and demand shocks to inflation. 6/n

Background: Monetary authorities have long recognized that commodity prices are significant inflation determinants but their predictive power has been low since the mid-80s. 5/n

We finally apply our indices to the inflation decomposition framework of Blanchard and Bernanke (2023) and corroborate their finding that the bulk of pandemic-era inflation can be attributed to commodity supply disruptions, resulting in price increases in goods markets. 4/n

Supply matters in particular circumstances, for instance during the recent period of the pandemic and geopolitical shocks. 3/n

Demand developments play a significantly larger role in prediction because they typically lead to uniform increases in quantities and prices of goods across the consumer basket, resulting in a clear and positive relationship between commodity prices and overall inflation. 2/n