Sharp rises in energy and other commodity prices have recently ignited concerns about inflation. Will these price increases spill over to other prices more generally? We study the typical responses of different price shocks and assess whether the recent behavior of producer and consumer prices is consistent with historical norms. Our analysis shows that the behavior of various producer and consumer prices since late 2009 has generally matched up with historical patterns. Overall, our findings suggest that effects of the recent energy and commodity price shocks on core consumer prices will be modest going forward.Food prices ; Petroleum products - Prices ; Economic conditions

Saeed Zaman

Todd E. Clark

English

Research Papers in Economics

ECONOMIC COMMENTARY
Number 2011-14
August 24, 2011
Food and Energy Price Shocks:  
What Other Prices Are Affected?
Todd E. Clark and Saeed Zaman
Sharp rises in energy and other commodity prices have recently ignited concerns about inﬂ  ation. Will these price in-
creases spill over to other prices more generally? We study the typical responses of different price shocks and assess 
whether the recent behavior of producer and consumer prices is consistent with historical norms.  Our analysis shows 
that the behavior of various producer and consumer prices since late 2009 has generally matched up with historical 
patterns. Overall, our ﬁ  ndings suggest that effects of the recent energy and commodity price shocks on core consumer 
prices will be modest going forward.
  ISSN 0428-1276
Sharp increases in energy and other commodity prices 
earlier this year have raised concerns about the potential 
for broader price effects. Broader effects will occur to the 
extent that rising energy and other commodity prices push 
up the costs of producing a wide array of other goods, 
and ﬁ  rms are forced to raise prices. Some such effects are 
already evident. For example, in the past year, producer 
prices for intermediate goods have risen nearly 12 percent, 
and prices for core intermediate goods have increased 
more than 7 percent. 
However, signiﬁ  cant effects on many consumer prices are 
harder to discern: excluding food and energy, consumer 
prices have increased only about 1.5 percent in the past 
12 months. Looking ahead, the effects of this year’s in-
creases in energy and other commodity prices on headline 
consumer price inﬂ  ation and non-food and non-energy 
inﬂ  ation are likely to be temporary and modest (see 
Beauchemin 2011 for the analysis).
How can it be that energy and commodity price increases 
have affected consumer prices less than they have affected 
other (non-consumer) prices, such as those for intermediate 
goods? To answer this question, we begin by brieﬂ  y sketch-
ing a conceptual framework that ties together different types 
of prices in a chain of production. We then use a forecasting 
model to examine the transmission of changes in oil and 
non-energy commodity prices to a range of producer and 
consumer prices. More speciﬁ  cally, we study the typical 
responses of different prices to shocks to energy and other 
commodity prices and assess whether the recent behavior of 
producer and consumer prices is consistent with historical 
norms. We also present forecasts for the remainder of 2011 
and 2012. 
Our analysis shows that the effects of shocks to energy and 
other commodity prices should be expected to be larger for 
prices of goods earlier in the production chain. For example, 
these shocks should be expected to cause sharper responses 
in producer prices than consumer prices. Our analysis also 
shows that, since late 2009, the response of various produc-
er and consumer prices to rising energy and other commod-
ity prices has generally matched up with historical patterns.
Conceptual Framework: Chain of Production
Producer and consumer price indexes can be viewed as 
prices of different goods along a chain of production, in 
which producer prices capture the prices of the input goods 
used to produce ﬁ  nal goods that are sold to consumers.1 For 
example, the producer price index (PPI) for crude materi-
als includes the price of iron, while the intermediate goods 
PPI includes the prices of steel mill products, which are 
produced using iron. The ﬁ  nished goods PPI includes the 
prices of machine tools, which are constructed from steel 
mill products. Finally, the price index for personal consump-
tion expenditures (PCE price index) includes the prices 
paid by consumers for goods, such as hand drills, which are 
produced using machine tools.
2011-14.indd   3 8/23/2011   7:53:13 PMFigure 1. Estimated Response to a Large Increase in Crude Oil Prices
Figure 2. Estimated Response to a Large Increase in Non-energy Commodity Prices
048 1 2 1 6
0
50
100 Oil price
048 1 2 1 6
0
10
20
30 Industrial 
commodities
048 1 2 1 6
0
20
40 Food commodities
048 1 2 1 6
0
5
10 PPI ﬁnal
048 1 2 1 6
0
10
PPI Intermediate 
048 1 2 1 6
0
20
40 PPI crude
048 1 2 1 6
0
2
4 Core PPI ﬁnal
048 1 2 1 6
0
5
10 Core PPI 
intermediate
048 1 2 1 6
0
10
20
30
Core PPI crude
048 1 2 1 6
−1
0
1
2
3 Core PCE goods
048 1 2 1 6
−1
0
1 Core PCE services
048 1 2 1 6
0
2
4
PCE food
048 1 2 1 6
0
10
20
30
PCE energy
048 1 2 1 6
−1
0
1
2 Unemployment rate
048 1 2 1 6
−6
−4
−2
0 Real GDP
048 1 2 1 6
−4
−2
0
2 Compensation
048 1 2 1 6
−2
−1
0
1 Federal funds rate
Percent change
Quarters from the shock
Percent change Percent change Percent change Percent
20
048 1 2 1 6
−50
0
50
Oil price
048 1 2 1 6
0
50
100 Industrial 
commodities
0 4 8 12 16
0
20
40
60
80 Food commodities
048 1 2 1 6
0
5
10
15 PPI ﬁnal
048 1 2 1 6
0
10
20
PPI intermediate
048 1 2 1 6
−40
−20
0
20
40
60 PPI crude
048 1 2 1 6
0
5
10 Core PPI ﬁnal
0 4 8 12 16
0
10
20 Core PPI 
intermediate
048 1 2 1 6
0
20
40
60
80 Core PPI crude
048 1 2 1 6
−2
0
2
4
6
8 Core PCE goods
0 4 8 12 16
0
2
4
6 Core PCE services
048 1 2 1 6
0
5
10
PCE food
048 1 2 1 6
−20
0
20
40 PCE energy
048 1 2 1 6
−4
−2
0
2 Unemployment rate
048 1 2 1 6
−5
0
5 Real GDP
048 1 2 1 6
−5
0
5 Compensation
048 1 2 1 6
−2
0
2
4
6 Federal funds rate
Percent change Percent change Percent change Percent change Percent 
2011-14.indd   4 8/23/2011   7:53:13 PMFigure 3. Observed Values and Forecasts
−20
−10
0
10
20
PPI intermediate
−50
0
50
100
PPI crude
−4
−2
0
2
4
6
Core PPI ﬁnal
−20
−10
0
10
20
Core PPI intermediate
200506 07 08 09 10 11 12
−100
−50
0
50
100
Oil price
−40
−20
0
20
40
60
Industrial commodities
−40
−20
0
20
40
60
Food commodities
−10
−5
0
5
10
PPI ﬁnal
Percent Percent
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12
−50
0
50
100
Core PPI crude
−4
−2
0
2
4
Core PCE goods
1
2
3
4
5
6
Core PCE services
−10
−5
0
5
10
PCE food
Percent
200506 07 08 09 10 11 12
200506 07 08 09 10 11 12 200506 07 08 09 10 11 12 200506 07 08 09 10 11 12
Observed value
Point forecast
2011-14.indd   5 8/23/2011   7:53:14 PM−50
0
50
PCE energy
200506 07 08 09 10 11 12
Percent
With ﬁ  rms in the economy setting their prices at some 
markup over their costs of production, changes in the costs 
of inputs may cause ﬁ  rms to change the prices of the goods 
they produce. For example, a sharp increase in oil prices will 
increase production costs for a ﬁ  rm that makes petroleum-
based plastics and may lead the ﬁ  rm to increase its price. In 
turn, a ﬁ  rm that produces a good that includes the plastics 
may experience a cost increase and may increase its price in 
response.2
In practice, though, the ties among producer and consumer 
prices may not be quite as strong as this simple conceptual 
framework suggests. The reason is that the available mea-
sures of producer and consumer prices differ importantly in 
deﬁ  nition. The PPIs measure only prices of goods produced 
in the U.S., while the PCE price index tracks the prices con-
sumers pay for goods and services that have been produced 
in the U.S. or imported. These differences may mean that 
some changes in producer prices will not show up in con-
sumer prices. For example, if the prices of imported goods 
fall while the PPI increases, the PCE price index might not 
change much on net. Similarly, if the services price com-
ponent of the PCE price index doesn’t change as the PPI 
increases, the overall PCE price index will rise considerably 
less than the PPI, reﬂ  ecting the large share of services in 
consumer spending (roughly 65 percent).
Forecasting Model
To empirically assess the ties among producer and con-
sumer prices, we use an expanded version of the forecasting 
model described in Ken Beauchemin’s Commentary, “Shocks 
and the Economic Outlook.” Our model is a 17-variable 
vector autoregression, which consists of equations relat-
ing the current value of each variable to past values of all 
variables.
The model variables include:
•  Producer price indexes (PPI) for crude materials, inter-
mediate goods, and the ﬁ  nished goods core (non-food 
and non-energy) 
•  Core price indexes for consumer goods and consumer 
services
•  The price index for consumer energy
•  The price index for consumer food
•  The price of oil 
•  The price index (spot) of commodity prices, raw indus-
trials 
•  The price index (spot) of commodity prices, foodstuffs
• Real  GDP 
•  The unemployment rate
•  Compensation per hour, nonfarm business sector 
•  The federal funds rate.
This model is similar to one developed by Giannone, Lenza, 
Momferatou, and Onorante (2010) for the purpose of fore-
casting inﬂ  ation in the euro area and examining the inﬂ  uences 
of various inﬂ  ation determinants. In general, vector autore-
gressive models have a long tradition in macroeconomic fore-
casting and have been shown to be effective for that purpose.
Typical Effects of Energy and Commodity Prices
We begin by using estimates of our model to assess the typi-
cal responses of producer and consumer prices to shocks to 
oil prices and non-energy commodity prices. 
Figure 1 traces out the estimated responses of prices and the 
other variables in the model to a large increase in crude oil 
prices, showing the point estimate of the response and the 95 
percent conﬁ  dence band around it. Our estimates represent 
the percentage point response of each variable to the shock 
to oil prices. The shock to oil prices is deﬁ  ned as a 100 per-
cent increase at the time of impact, broadly consistent with 
the approximate doubling of oil prices that actually occurred 
from early 2009 to early 2011. 
The results in ﬁ  gure 1 indicate that the effects of an oil price 
shock diminish over the chain of production, being larg-
est for PPIs for crude materials, next largest for PPIs for 
intermediate goods, and more modest for PPIs for ﬁ  nished 
goods. For example, a few quarters after the oil price shock 
occurs, the PPIs for crude, intermediate, and ﬁ  nal goods (the 
headline measures, which include food and energy prices) 
rise by about 30 percent, 10 percent, and 6 percent, respec-
tively. The estimates also show that the headline measures of 
producer prices respond signiﬁ  cantly more than do the core 
measures.
Consistent with the ﬁ  ndings of other researchers, our model 
estimates also indicate that the historical effects of energy 
prices on a broad range of consumer prices have gener-
ally been modest. Indeed, in ﬁ  gure 1, the responses of core 
consumer goods and services prices as measured by the 
PCE indexes are small enough that, in a statistical sense, 
they are not signiﬁ  cantly different from zero.3 However, oil 
2011-14.indd   6 8/23/2011   7:53:15 PMﬁ  dence bands from the model. For example, the actual rise 
in the headline and core PPIs for intermediate goods match 
up quite closely with the point forecast from the model, 
given the behavior of energy and commodity prices since 
mid-2009. The same applies to consumer food and energy 
prices. The most notable exception occurs with core PCE 
services prices, for which the actual increase in the price 
level has been much smaller than in the model’s forecast. 
Admittedly, this exception has no obvious explanation.
Conclusion
While the analysis in this article has focused on the rise in 
oil and commodity prices that occurred from 2009 through 
the early part of 2011, it remains to be seen how producer 
and consumer prices will evolve in response to the past 
increases in oil and commodity prices and more recent 
declines in oil and commodity prices. This analysis suggests 
declines in oil and commodity prices will slow producer 
prices more than most consumer prices. But only time will 
tell for sure.
Footnotes
1. See Clark (1995) for a more detailed discussion of the 
chain of production.
2. The relationships among producer and consumer prices 
are also likely to be more complicated than the simple concep-
tual framework suggests. The reason is that the relationships 
among U.S. industries are so intricate and complicated that 
it is impossible to separate industry-level prices into clear-cut 
crude, intermediate, and ﬁ  nished good categories, such that 
crude materials are used only to produce intermediate goods, 
which in turn are used only to produce ﬁ  nished goods. For 
example, items included in the crude materials category are 
often used to produce goods included in both the intermedi-
ate and ﬁ  nished goods categories. Accordingly, an increase in 
the prices of some crude materials may inﬂ  ate the prices of 
both some intermediate and some ﬁ  nished goods.
3. That said, some supplementary analysis of more detailed 
indexes of goods and services prices showed that some 
speciﬁ  c prices (such as transportation costs), which might be 
expected to be sensitive to energy and commodity prices, do 
in fact respond to the shocks we considered in our analysis.
References
“Shocks and the Economic Outlook,” by Kenneth R. 
Beauchemin, 2011. Federal Reserve Bank of Cleveland, 
Economic Commentary, 2010-12.
“Do Producer Prices Lead Consumer Prices?” by Todd E. 
Clark, 1995. Federal Reserve Bank of Kansas City, Economic 
Review, fourth quarter.
“Short-Term Inﬂ  ation Projections: A Bayesian Vector Autore-
gressive Approach,” by Domenico Giannone, Michele Lenza, 
Daphne Momferatou, and Luca Onorante. 2010. Center for 
Economic Policy Research, discussion paper, no. 7746.
price increases do cause consumer food and energy prices to 
rise signiﬁ  cantly. In our estimates, the approximate doubling 
of oil prices causes PCE food prices to rise about 2 percent 
and PCE energy prices to jump as much as 30 percent. The 
large oil price shock also causes a signiﬁ  cant slowing of the 
economy, reducing the level of GDP by about 2 percent 
over the ﬁ  rst two years following the shock.
Figure 2 reports the effects of a shock to non-energy com-
modity prices. Broadly, the responses of producer and 
consumer prices to a commodity price shock are similar to 
the responses to an oil price shock, in the following respects. 
First, the effects of the shock diminish over the chain of 
production. Second, headline PPIs respond more to com-
modity prices than do core PPIs. Third, the responses of 
core consumer prices are relatively modest. 
Beyond those similarities, these commodity price shocks 
have modestly different effects on the prices of core PCE 
goods and services. The change in core PCE goods prices is 
not signiﬁ  cantly different from zero (statistically speaking), 
but that of core PCE services prices is. Core services prices 
rise signiﬁ  cantly, although modestly compared to PPI prices. 
Some supplementary analysis of more detailed PCE prices 
suggests this services response may reﬂ  ect the effect of dol-
lar depreciation (following the commodity price shock) on 
some components of services prices, such as foreign travel. 
Finally, the commodity price shock is associated with signiﬁ  -
cant increases in consumer food and energy prices.
Recent Price Responses Against Historical Norms
Building on our assessment of the typical responses of pro-
ducer and consumer prices to energy and non-energy com-
modity price changes, we now use our forecasting model 
to determine whether the actual movements of prices in the 
last few years have been consistent with historical norms. 
More speciﬁ  cally, to set the historical norms, we turn the 
clock back to mid-2009, and we use the model to forecast 
producer and consumer prices from mid-2009 through the 
mid-2012, taking as given the actual paths of oil, non-energy 
commodity, and food prices. 
These forecasted paths of producer and consumer prices are 
taken as the historical norms. They capture what the model 
implies should have happened to prices in response to the 
increases in oil, commodity, and food prices that actually 
occurred from the third quarter of 2009 through the second 
quarter of 2011. If the actual movements of consumer and 
producer prices since mid-2009 look similar to the forecasts 
from the model, we will judge the actual changes in prices to 
be consistent with historical norms.
Figure 3 reports the results in the form of fan charts, which 
show the observed value, the point forecast, and forecast 
conﬁ  dence bands of 10 percent, 20 percent, 30 percent, etc., 
up to 90 percent. According to the forecasts, the recent be-
havior of producer and consumer prices has been consistent 
with historical norms. In almost all cases, the actual paths 
of producer and consumer prices lie within the forecast con-
2011-14.indd   1 8/23/2011   7:53:10 PMTodd E. Clark is a vice president and economist at the Federal Reserve Bank of Cleveland, and Saeed Zaman is a senior economic analyst 
at the Bank. The views they express here are theirs and not necessarily those of the Federal Reserve Bank of Cleveland, the Board of 
Governors of the Federal Reserve System, or Board staff.
Economic Commentary is published by the Research Department of the Federal Reserve Bank of Cleveland. To receive copies or be placed 
on the mailing list, e-mail your request to 4d.subscriptions@clev.frb.org or fax it to 216.579.3050. Economic Commentary is also available 
on the Cleveland Fed’s Web site at www.clevelandfed.org/research. 
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2011-14.indd   2 8/23/2011   7:53:13 PM

Federal Reserve Bank of Kansas City, Economic Review, fourth quarter.

Short-Term Inﬂ ation Projections: A Bayesian Vector Autoregressive Approach,” by

the Economic Outlook,” by

Food and energy price shocks: what other prices are affected?

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Food and energy price shocks: what other prices are affected?

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