What do commodity prices tell us about inflation? Sometimes a lot, sometimes a little. Today, commodity prices say that global demand for goods is strong relative to global supply. That’s not enough by itself for persistent overall inflation, but it’s certainly a start. Commodity prices say we should be very worried about the prospects for accelerating inflation in the next few years, but inflation is not inevitable.

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Commodities themselves do not constitute a large portion of the cost of what we buy. Labor is the largest cost of most goods, and our economy has a large service sector where commodity prices do not directly add to costs. But commodities provide a signal about global balances between supply and demand.

Anecdotes of one price or another rising quickly do not mean that overall inflation will accelerate. Individual prices can rise or fall completely independently of the overall inflation picture. The current trends for lumber and plywood prices provide a good example. Early in 2020 lockdowns led many homeowners to do-it-yourself projects and mortgage interest rates took a steep dive, prompting many people to buy new houses. Wood products executives enjoyed the demand but worried that it would be temporary. They thought about people who would have bought a house in two or three years if mortgage rates had not plummeted. These people were able to buy a house in 2020 or 2021. The lumber executives concluded that the increased demand was not a long-term fundamental shift but a timing issue. Demand for wood increased faster than supply could increase, and the industry could not, or would not, bring much new capacity online during the time of strong demand.

The result was the rapid increase in prices for lumber and plywood. But that does not tell us about pressure on the overall price level across the economy.

Some commodities are driven by broader economic forces and tell us more about the prospects for overall inflation. Oil (OIL) and copper (JJC) prices provide a magnified picture of the economy, as moderate changes in demand can trigger outsized changes in price. A small increase in demand leads producers to dial up production, but that only goes so far. At some point, capacity is fully used. Further increases in production take years for drilling and oilfield infrastructure in the case of petroleum, or opening new mines and smelters in the case of copper. In the interim, prices rise sharply so that buying is discouraged sufficiently that demand matches supply.