During the 1970s the world economy suffered two price shocks. From 1972 through 1974 the prices of primary commodities—in particular grains and petroleum—rose to unprecedented levels in world markets. After 1974 many of these prices fell, but again in 1979 world oil prices doubled and the prices of other basic commodities increased rapidly. What were the causes and consequences of these large price fluctuations? Were they the main reason for the worsening of inflation during the 1970s? And what can be done to restrain their influence on inflation in the future?
The authors of this study address these and other issues relating to inflation and commodity price behavior. After discussing the nature of the commodity markets, they compare the effects of the market disruptions in the 1970s on the economies of the United States, Japan, and the Western European countries. They then go on to examine the extent to which the commodity market fluctuations resulted from the interaction of supply and demand and from changes in market structure. In the last two chapters they consider some policy options for dealing with commodity market instability. After concluding that no good options for macroeconomic policy exists, they focus on microeconomic policies for stabilizing prices by intervening in specific markets. For the grain market, they advocate bilateral agreements with foreign governments to guarantee access to the U.S. market, combined with a substantial U. S. grain reserve. For the energy market, they advocate international agreements by consuming nations to limit imports as well as the establishment of a large U. S. petroleum reserve.
Robert Z. Lawrence
April 1, 1996