Chapter 11: Commodity Prices and the Dynamics of Inflation in Australia
11. Commodity prices and the dynamics of inﬂation in Australia* Harry Bloch and David Sapsford INTRODUCTION Explanations of inﬂation tend to emphasize domestic market conditions, particularly labor market institutions and the strength of demand for domestic output relative to productive capacity. In the present chapter we examine an additional inﬂuence on the inﬂationary process, namely the prices of primary commodities. Our approach is to incorporate primary product prices into a structural model of pricing that is developed from the pricing analysis of Michal Kalecki. Kalecki (1971, ch. 5) treats the cost of ﬁnished goods as determined by both the prices of primary commodities used as raw materials and the wage rates of industrial labor. He then argues that primary commodity prices have a stronger positive relationship to the business cycle than do wage rates, so the ratio of primary commodity prices to wage rates is pro-cyclical. Further, prime costs are marked up to determine ﬁnished goods prices, implying cyclical variation in the real wage rate and distribution of income. We employ Kalecki’s pricing analysis to consider the implications for the dynamics of inﬂation arising from the cyclical behavior of primary product prices. Our particular concern is that the pro-cyclical movement in primary commodities relative to wage rates can set off a wage-price spiral for ﬁnished goods through the resulting pressure on the nominal wages of industrial workers. Of course, this scenario can also work in reverse, as Beckerman and Jenkinson (1986) suggest in explaining the...
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