Commodity prices are said to be leading indicators of inflation through two basic channels that is they respond more quickly to general economic shocks, such as an increase in demand and some changes in commodity prices reflect idiosyncratic shocks, such as a flood that reduces the supply of certain agricultural products, which are subsequently passed through to over-all prices. Depending on the type of the shock, the observed link between commodity prices and inflation would be expected to be different. The strongest case for commodity prices as indicators of future inflation is that they are quick to respond to economy wide shocks to demand. In this study the relationship between prices of commodities and domestic inflation in India has been explored empirically for the period 2006 to 2011. For this purpose future and spot commodity price and domestic WPI and CPI weights has been constructed. The empirical results show that cointegration and causality between them.

KEYWORDS: Commodity prices, inflation, cointegration, causality,