A similar question has been asked but not completely answered. So I repeat it here. Why are Agricultural commodities and unexpected inflation negatively correlated? On Curriculum volume 5, page 57, exhibit 19, The correlation between GSCI Agri and Unexpected Inflation is -0.27; The correlation between S&P 500 and Unexpected Inflation is -0.23; From the data, 1) Agricultural commodities is almost as good as equities as an inflation hedge. 2) Stock market has been trending higher in real and nominal terms. Where did the negative correlation come from? A similar question is: http://www.analystforum.com/phorums/read.php?13,1122990,1123432#msg-1123432 The problem could come from “Unexpected Inflation”, which I don’t quite understand.
You answered your own question. If you expect inflation, you can pass it on immediately.
“Why are Agricultural commodities and unexpected inflation negatively correlated?” English is my first language and it still takes 3 reads to get the question.
Sorry about that. For example, let’s consider the price of corn. If the inflation has just increased unexpectedly by 2%, will we see the corn’s price decrease? All else equal, I would expect a smaller or no increase in the price. Storability and demand can explain it, but these two are not directly related to inflation.
Inflation doesn’t just jump to 2% unexpectedly (unless you are reading the news). Possibly has to do with hedging? Or I assume that unexpected inflation may cause some volatility? All of this analysis is backward looking. You are selling your corn based on what you thought inflation was going to be. You only find out later that you should have sold it for more (I don’t think the example means the reaction to the price after discovering what actual inflation was – but I have not read CFAI) Maybe you even hedged some of the risk of unexpected inflation, which will cost you. I am reaching here…
Thanks. It might be inflation adjusted.