Economics Letters 181 (2019) 90–94

Contents lists available at ScienceDirect

Economics Letters
journal homepage: www.elsevier.com/locate/ecolet

Inflation hedging with commodities: A wavelet analysis of seven

centuries worth of data
∗
Adam Zaremba a,c , , Zaghum Umar b , Mateusz Mikutowski a
a
Department of Investment and Capital Markets, Faculty of Management, Poznań University of Economics and Business, al. Niepodległości
10, 61-875 Poznań, Poland
b
College of Business, Zayed University, P.O. Box 144534, Abu Dhabi, United Arab Emirates
c
Dubai Business School, University of Dubai, Academic City, P.O. Box 14143, Dubai, United Arab Emirates

highlights

• We test the inflation hedging properties of commodities on the longest data series ever used.
• We apply wavelet analysis to commodity prices and UK inflation for the years 1265–2017.
• Commodities co-move with inflation in the 4- to 8-year horizon.
• The phenomenon is robust for agricultural, energy, and industrial commodities.
• The correlation was strong from the 13th to the 19th centuries and weakened in the 20th century.

article info a b s t r a c t

Article history: We perform a test of the inflation hedging properties of commodities on the longest data series ever
Received 17 March 2019 used for this purpose. We apply wavelet analysis to commodity prices and inflation data from the
Accepted 1 May 2019 United Kingdom for the years 1265 through 2017, to detect co-movement across different times and
Available online 11 May 2019
frequencies. We demonstrate robust inflation hedging properties of agricultural, energy, and industrial
JEL classification: commodities for the 4- to 8-year horizon through almost the entire seven centuries.
G11 © 2019 Elsevier B.V. All rights reserved.
G14
E44

Keywords:
Inflation hedging
Commodity markets
Early commodity prices
Wavelet analysis

1. Introduction an examination of inflation hedging properties of commodities

Securing the value of your savings is one of the major goals
of financial investment. To date, numerous studies have demon-
strated the inflation hedging properties of different asset classes,
particularly commodities (see Alagidede and Panagiotidis, 2012;
Arnold and Auer, 2015; Spierdijk and Umar, 2015). Notably, re-
cent development of databases that include early financial data
have allowed examination of the inflation hedging properties of
commodities or equities for periods spanning up to 300 years in
the past (e.g., Bampinas and Panagiotidis, 2015; Kim and Ryoo,
2011; Tiwari et al., 2018). In this study, we increase the period
tested to more than seven centuries. In consequence, we conduct
∗ Corresponding author.
E-mail addresses: adam.zaremba@ue.poznan.pl (A. Zaremba),
zaghum.umar@gmail.com (Z. Umar), mateusz.mikutowski@ue.poznan.pl
(M. Mikutowski).
over the longest period ever studied, extending the earlier studies
on this topic by several centuries.
Using a unique dataset, we investigate the co-movements of
aggregate commodity prices and inflation rates in the United
Kingdom (UK) for the years 1265–2017. To accomplish this, in-
stead of relying on classic inflation hedging measures based on
correlations and regression coefficients, we apply state-of-the-art
wavelet analysis as in Tiwari et al. (2018), which allows us to
efficiently present the co-movements across different times and
frequencies.
Our findings confirm strong co-movement of commodity re-
turns, both nominal and real, and UK inflation rates. The effect
is robust for both an aggregate commodity basket and for dif-
ferent commodity classes: agriculturals, industrials, and energy.
The strong inflation hedging properties are visible and significant
for the 4- to 8-year horizon from the 13th century to the 19th

https://doi.org/10.1016/j.econlet.2019.05.002
0165-1765/© 2019 Elsevier B.V. All rights reserved.
 A. Zaremba, Z. Umar and M. Mikutowski / Economics Letters 181 (2019) 90–94
Fig. 1. Wavelet power spectrum and average wavelet power for the composite commodity index. (For interpretation of the references to color in this figure legend,
the reader is referred to the web version of this article.)
century; they have somewhat faded in the 20th century, perhaps
due to the structural changes in the economy and the shift to
service-based models.
The remainder of this article is organized as follows. Section 2
presents the data and methods. Section 3 discusses the empirical
findings. Finally, Section 4 concludes the study.
2. Data and methods
Our study is based on long-run commodity data sourced from
Global Financial Data.1 The sample runs from 1265 to 2017, and
– following Zaremba et al. (2019) we use annual intervals for
the analysis because monthly or daily data is generally unavail-
able prior to the 19th century. Our base measure of commodity
prices is the GFD Commodity Composite Index, which tracks spot
prices of about 50 commodities. The index is split into three
sub-indices covering agriculturals—beer, cocoa, coffee, milk, tea,
butter, cheese, eggs, potatoes, sugar, barley, corn, hay, oats, rice,
wheat, hogs, cattle, lambs, corn oil, cottonseed oil, cottonseed
meal, flaxseed, lard, oatmeal, palm oil, soybean meal, soybean
oil, soybeans, and tallow; industrials—aluminum, copper, iron,
lead, nickel, steel, tin, zinc, cotton, rubber, tobacco, wood, wool,
gold, palladium, platinum, and silver; and energy—coal, coal gas,
firewood, natural gas, lamp oil, whale oil, and petroleum. No exact
production or consumption data is available for the period before
the 1900s, therefore components are weighted on the amount
of trade and production or using arbitrary weights. The indices
are based on U.S. prices when available (usually only the 20th
century), and on English price data otherwise, particularly for
1 https://www.globalfinancialdata.com.
91
earlier periods. The prices are compiled from different sources,
such as stock exchanges and history books, including Cole (1938)
and Clark (2004), and chain-linked to form a continuous time
series.
As the measure of inflation, we use the United Kingdom Retail
Price Index Inflation Rate by GFD. We focus on the UK data
due to its long-run data availability—the inflation rate in the UK
can be traced back as far as the 13th century. The chain-linked
price index by GFD combines several measures, including the
Retail Price Index, the Cost of Living Index, and a compilation of
several historical sources, including Brown and Hopkins (1956),
in particular (details available from GFD). Finally, to be consistent
with our focus on the UK and its inflation rate, all commodity
returns are expressed in GBP.
Table 1 reports the summary statistics for our research sample.
To research the inflation hedging properties of commodities,
we use wavelet multi-scale analysis (see, e.g., Torrence and
Compo, 1998) which allows for a decomposition of time se-
ries over both time and scale. Hence, we are able to assess the
correlation levels at different moments in time and frequen-
cies. Although computationally complex, the wavelets are finely
detailed, allowing for a good understanding of the spectral char-
acteristics of time series, and dealing well with the non-stationary
behavior and non-normality of financial data (Conlon et al., 2018).
In particular, in our investigations we focus on two measures: the
wavelet power spectrum (WPS) and the cross-wavelet transform
(XWT). The first displays the occurrence of extreme events; the
second measures co-movements of two series. We derive both
measures using the continuous wavelet transform, and in all our
calculations we closely replicate the implementation of Tiwari
et al. (2018).
92 A. Zaremba, Z. Umar and M. Mikutowski / Economics Letters 181 (2019) 90–94

Fig. 2. Cross-wavelet transform and average wavelet power for the composite commodity index. (For interpretation of the references to color in this figure legend,
the reader is referred to the web version of this article.)

Table 1
Descriptive statistics of inflation rates and commodity index returns.
GFD composite GFD energy GFD agricultural GFD industrial United Kingdom
commodity index commodity index commodity index commodity index retail price index
inflation rate
Average 0.0146 0.0221 0.0163 0.0133 0.0145
Standard deviation 0.1066 0.1653 0.1265 0.1209 0.1050
Skewness 1.0981 2.2585 0.7374 1.1998 0.3836
Kurtosis 5.9295 14.1202 3.7605 4.9268 2.9641
Minimum −0.4594 −0.5008 −0.4769 −0.4238 −0.4377
1st quartile −0.0471 −0.0614 −0.0617 −0.0518 −0.0419
Median 0.0069 0.0034 0.0116 0.0019 0.0106
3rd quartile 0.0596 0.0794 0.0766 0.0612 0.0646
Maximum 0.7439 1.5701 0.8032 0.6565 0.6363
No. of observations 752 752 752 752 752

Note. The table reports the descriptive statistics for the yearly changes in commodity and UK retail price indices.

3. Results
Figs. 1–3 summarize our findings, exhibiting the WPS along
with its average power spectrum and the XWT along with its
average power spectrum. The outcomes are displayed in con-
tour plots with three dimensions: time spaces (horizontal axis),
frequency (vertical axis), and the wavelet spectrum values (col-
ored spectrum of rising intensity from dark blue to red). The
frequency is expressed in yearly units, ranging from the highest
frequency of two years (bottom of the plot) to the lowest fre-
quency of 256 years (top of the plot). A significant red color at
the top (bottom) suggests the occurrence of extreme events at
low (high) frequencies, whereas areas of blue color indicate a lack
of significant scenarios.
Let us begin with an overview of the results for the aggregate
commodity portfolio represented by the GFD Composite Com-
modity Index. Fig. 1 presents the WPS for nominal commodity
returns (Panel A), real commodity returns (Panel B), and inflation
(Panel C), as well as the average wavelet power (Panel D) giving
the average variance contained in all the wavelet coefficients at a
given frequency. Although the WPS is not an explicit proof of co-
movements or lead–lag relationships between commodity prices
and inflation, it helps to identify some similarities in the evolution
of data across the time scale.
 A. Zaremba, Z. Umar and M. Mikutowski / Economics Letters 181 (2019) 90–94 93

Fig. 3. Cross-wavelet transform and average wavelet power for inflation and nominal returns on the agriculture, industrial, and energy indices. (For interpretation
of the references to color in this figure legend, the reader is referred to the web version of this article.)

Importantly, the nominal and real commodity returns, as well
as inflation, display elevated wavelet power levels for the 2- to
8-year scale—represented by the red contour. This might be inter-
preted as a first sign of interdependencies. The average wavelet
power plot also confirms the significant common years scale
of 2–8 between nominal commodity returns and inflation. The
similarities between inflation and commodity behavior are clearly
visible for the 13th through 19th centuries; they are noticeably
weaker in the 20th century.
The findings reported in Fig. 2 formalize our intuition on co-
movements of inflation and commodity returns over the long
run. The vivid red color for the 2- to 8-year frequencies indi-
cates a reliable relationship between the two series, and the
average power plot corroborates its significance at the 5% level
for the 4- to 8-year scale. Again, as in Fig. 1, the similarity in
the co-movement is solid from the 13th century through the
19th century, but markedly weaker similarity during the last
century. This phenomenon could be interpreted as the dimin-
ishing role of commodity prices in the modern service-based
economy. Notably, the relationship with inflation is similarly
strong for both nominal and real composite commodity returns.
Nonetheless, there is a considerable difference in the direction
of the commodity–inflation relationship when the nominal and
94 A. Zaremba, Z. Umar and M. Mikutowski / Economics Letters 181 (2019) 90–94
real returns are considered. Information in this regard is given
by the arrows in the plot. The phase arrows facing west (east)
indicate out-of- (in-) phase co-movement, and the south- (north-)
facing arrows represent the situation where the commodities lead
(lag) inflation. For nominal commodity returns, the arrows pre-
dominantly point to the east, suggesting in-phase co-movements:
high commodity returns are accompanied by high inflation rates.
For the real commodity returns, however, the relationship is the
inverse, with predominantly west-facing arrows indicating an
out-of-phase relationship.
Finally, Fig. 3 extends our aggregate commodity-level investi-
gations to the three sub-indices: agriculture, industrial, and en-
ergy. For brevity, we focus solely on the cross-wavelet analysis of
the nominal price changes. Remarkably, the relationship between
inflation and commodity returns is strong for all three commodity
classes. The red color suggests a clear link between commodity
prices and inflation for the 2- to 8-year frequency for almost the
entire study period, and the east-facing arrows indicate in-phase
co-movements. This relationship, however, weakens in the 20th
century, similar to the results in Figs. 1 and 2, pointing to the pos-
sible lesser importance of commodity prices in the contemporary
service-based economy. The formal analysis of the average cross-
wavelet plots (Panels B, D, and E) confirms the statistical validity
of our findings. Nonetheless, the effect appears to be the most
robust for agricultural commodities, which played a crucial role
in the pre-industrial era that constitutes the majority of our time
sample.
4. Concluding remarks
In this study, we have demonstrated that the inflation hedging
properties of commodities in the UK have been evident for almost
750 years. The co-movement is strong at the aggregate level
and also for different commodity classes – energy, industrials,
or agriculturals – but it visibly weakened in the 20th century.
Future studies on inflation hedging using early commodities data
could extend our research to different countries, currencies, and
the role of individual commodities.
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