Commodity Prices

That 70s Show: Inflation is back.

Phillip Nones Business, Economics, Social Commentary , , , ,

The rise in lumber prices has received a certain degree of coverage in the news in recent weeks and months.  For anyone who used the “pandemic period” to engage in home remodeling or renovation projects – perhaps moving away from “open concept everything” to reintroduce the designated spaces of yesteryear – the eye-popping price of lumber has come as something of a shock.

As for explaining the sharp increase, it’s logical to think that prices are directly correlated to the increased demand for the product.  But this explanation is incomplete; the steep price rise in a wide range of commodities well beyond just lumber tells us that inflation isn’t relegated to just a few high-demand product categories.  It’s the closest thing to “across the board” that we’ve seen in over 40 years — and the issue seemed to come out of nowhere.

Price inflation has been such a non-factor for so many decades, most consumers don’t even have personal memories of it.  But those of us “of a certain age” remember well how difficult it was to navigate an “inflation-everywhere” environment where annual salary increases could never keep pace with rising prices. 

It was difficult on people with fixed incomes, of course, but perhaps worse for young consumers who found that struggling to save for a down payment on a house purchase was a losing proposition as the gap widened rather than narrowed year over year.  Living like a monk while scrimping and saving for a house gets old when you realize that your efforts aren’t getting you anywhere near where you’re attempting to go … 

As for the situation now, the inflation warning signs are all around us if we dare to look. According to a report published in the May 21, 2021 issue of The Wall Street Journal, lumber may exhibit the most visible spike in prices, but consider what futures prices are showing for a whole range of commodities when compared to just one year ago:

  • Gold:  +7%
  • Platinum:  +29%
  • Wheat:  +31%
  • Cotton:  +40%
  • Coffee:  +42%
  • Sugar:  +52%
  • Silver:  +56%
  • Natural gas:  +65%
  • Soybeans:  +81%
  • Crude oil:  +85%
  • Cooper:  +86%
  • Gasoline:  +96%
  • Corn:  +108%
  • Lumber:  +278%

It doesn’t take a degree in economics to know that these sorts of trends are pretty alarming.  Whenever it has an opportunity to take hold, inflation is one of the most insidious of economic problems – and one that’s extremely difficult to reverse.  Inflation is also very debilitating for the personal budgets of the large majority of consumers, and it causes the most harm to those on the lower rungs of the economic ladder.

The next few months will tell us if this particular inflation is going to be a temporary phenomenon or not.  How much of the commodity price increases are attributable to transitory events that will ease as the world’s economies move further from lockdown?

But if this inflation turns out to be something more structural or more directly correlated to the massive increase in government spending paid for by the expanded money supply, expect the economic (and political) climate to begin to look vastly different in the coming months. 

Inflation will be uncharted territory for most people.  But a few of us veterans will be around to provide context and counsel — and perhaps engage in a bit of “Sister Toldja” commentary while we’re at it …

Move over, energy costs … Here come higher food prices.

Phillip Nones Uncategorized , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Higher food prices like higher energy pricesIf it seems as if food prices have been increasing at a faster clip in recent months, you’re not dreaming.

Despite an overall inflation rate that seems low (although the federal government’s controversial exclusion of certain key components like gasoline makes its stats suspicious at best), we now have solid evidence that worldwide food cost increases are happening across the board.

Here’s a list of some of the most dramatic cost increases for key foodstuffs recorded since May 2010:

 Coconut oil: +134%
 Corn/maize: +111%
 Wheat: +75%
 Coffee: +70%
 Sugar: +55%
 Soybeans: +45%
 Palm oil: +42%
 Orange juice: +35%
 Beef and pork: +20%

Considering that this represents a time period of just a little over a year, these increases are some the largest recorded in decades.

What caused it to happen? Poor weather and bad harvests are two of the reasons. But high demand from developing countries – particularly China – is another important factor.

“This is a pretty sustainable increase … A number of factors have been building over time in terms of the commodity increase: world economic growth, rising crude oil prices, increased Chinese import demand have all conspired,” is how Bill Lapp, president of commodity analytical company Advanced Economic Solutions, puts it.

Unfortunately, the problem promises to persist, since many of the items above are ingredients that go into other prepared food items. Initially, packaged food makers that had locked in purchases for some items over certain time periods were able to delay delay passing on cost increases because of those hedges. But the bulk of those contracts have run their course by now.

So, even if commodity prices don’t go any higher, we’re likely to see the ripple effects in pass-along price increases all throughout the “food chain” in the months to come.

This isn’t news anyone wants to hear, considering how fragile (non-existent?) the economic recovery is here in the U.S. and in many other countries as well.

The sober truth is, high food costs coupled with increased energy prices have a chokehold on the world economy that is more consequential than many would care to admit.

Fasten your seatbelts, folks. We may be in for yet another wild ride on the economic roller-coaster …