Are China's Commodity Futures Conductive To Forecast Inflation Rates?

This paper is inspired by the classical inventory carrying cost theory and backwardation theory in the commodity futures markets.The statistical method of principal components analysis is applied to extract the first two components of convenient yields and cyclical components of commodity futures spot prices.It is found that China's commodity futures markets contain critical information for predicting inflation rates accurately in the future.This result remains stable after controlling the effects of interest rates and growth rate of M2.The outstanding forecasting performance of convenience yields and cyclical components of commodity futures spot prices are verified in the out-of-sample forecast,which is much better than that of our benchmark model as well as Lang Run Prediction issued by CCER in Peking University.We again establish linear models using a great diversity of commodity futures indices and evaluate in-sample and out-of-sample performance based on root of mean squared error.All of these models outperform our benchmark model and Lang Run Prediction.Our findings confirm that commodity futures markets implicitly include potential trend of inflation rates and other key indicators of macro-economy in the future.All of the participants in the markets as well as government should take the commodity futures markets as an important reference when making investment decisions and enacting regulations.