Commodity Prices, Convenience Yields and Ination

Commodity prices are often thought to have in‡ationary consequences but formal statistical evidence in support of this perception has been far from robust. In this paper, we provide evidence that the two leading principal components in a panel of 23 commodity convenience yields have statistically and quantitatively important predictive power for in‡ation even after controlling for unemployment gap and oil prices. The results hold up in out-of-sample forecasts, across forecast horizons, and across G-7 countries. The individual and aggregate convenience yields also explain commodity prices and can be seen as informational variables about future economic conditions as conveyed by the futures markets. A bootstrap procedure for conducting inference when the principal components are used as regressors is also proposed. Keywords: bootstrap principal components, commodity futures, in‡ation predictability. JEL Classi…cation: C22, C53, E37, G12. Concordia University and CIREQ, 1455 de Maisonneuve Blvd. West, Montreal, QC H3G 1M8, Canada. Email: [email protected] yColumbia University, 420 W. 118 St. MC 3308, New York, NY 10027. Email: [email protected] We would like to thank the editor, two anonymous referees, Lutz Kilian, Benoit Perron, participants at the Applied Econometrics Workshop at the Federal Reserve Bank of St. Louis, and the 4th CIREQ Time Series Conference for helpful comments. We also thank Ibrahim Jamali and Van Hai Nguyen for research assistance. The …rst author gratefully acknowledges …nancial support from FQRSC, IFM2 and SSHRC. The second author acknowledges …nancial support from the National Science Foundation (SES-0962431).