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The Inflation Beat
Q & A
Inflation Forecasting Methodologies
Drive a car? Building a deck or shed?  Making meatloaf?  All of these tasks involve the purchase of basic commodities that will contribue to overall cost of your task at hand.

Commodity prices are far more volitile than say, labor costs or the amount of time it might take to perform the task.  They most certainly can be both an inflationary force or a deflationary force.

What I use for the sourse of commodity prices for the sake of forecasting inflation, is the producer price index of all commodities.
U.S. Bureau of Labor Statistics, Producer Price Index for All Commodities [PPIACO], retrieved from FRED, Federal Reserve Bank of St. Louis;, August 16, 2019.
The above chart is an index of the nominal price of commodities.  That means that it's not adjusted for inflation.

So with that said, what I do is make a ratio of the producer price index for all commodities to the average hourly earnings for the private sector.

I want to know, how much of the producer price index of commoditites can 1 hour of wages purchase.
This is a telling chart because it helps to capture episodes in the past when inflation was running high or when inflation was under control.

During the 1970's, inflation was running very high and a big part of the reason was the commodity prices were rising faster than wages.  The big decline in the amount of commodites an hour of wages would by from 1974 into 1981 helped fuel that inflation during the 1970s.  

The US dollar strength plays a role in what the prices of commodites are in dollars.  Supply and demand also play a role in commodity prices.  

What I want to look for when inflation forecasting is where this ratio of the producer price index of all commodities to wages is headed.

This report comes out monthy so it's timely.  
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