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Economy in Brief

Commodity Prices Surge
by Tom Moeller March 31, 2008

Not only have petroleum prices and gold prices surged, but in their wake has been broad based strength in commodity prices.

Industrial metals have remained strong recently despite the weakening of U.S. industrial sector activity. Continued strength in activity in the rest of the world accounts for the increase in metals prices. The table below indicates that aluminum prices are 10% above their 2007 average and they are 46% above 2005. Stainless steel scrap is up 6% from 2007 and more than double the 2005 average price. Prices for copper scrap round out the story of price strength and are 21% higher than last year and they are they are up one and a half times since 2005.

Food prices show less broad based strength. Beef prices generally have moved sideways during the last few years. Milk prices have been volatile. Recently a sharp decline offset what previously was a huge milk price gain and left prices up by nearly one third from the 2005 average. Grain prices are another story with corn prices up strongly in part due to demand for ethanol. Corn prices have nearly tripled the 2005 average and wheat prices similarly have surged.

Strength in oil prices comes from several sources that have nearly doubled crude costs since 2005. 1) Growth in U.S. demand for oil remains firm. It only recently turned slightly negative y/y. 2) Demand from the rest of the world, notably China, is firm. 3) Supply is questionable with the War in Iraq ongoing.

Then there's the price of gold which has nearly doubled since 2005 and touched $1,000 per ounce mostly due to global unrest.

Why hasn't all this commodity price strength shown up more in consumer prices? That's because processing and distribution costs of food account for most of the price consumers pay. Distribution & processing costs have gone up but not nearly as dramatically. The same is true for industrial materials prices, at least in the U.S. As for crude oil, the price gain has fed through and lifted gasoline prices by nearly 50% since 2005 (That's not to mention that gas prices have more than tripled since 1995.)

How does all this shake out? For a while the price strength caused slower than anticipated declines in U.S. interest rates. That has now changed as the Federal Reserve is reacting more to the weakening in economic activity. For U.S. inflation the price gains likely will add further upward pressure, especially since labor costs are rising as is economic liquidity. Will consumer price inflation, therefore, move much higher? A Consensus of economists says no. Weaker U.S. economic growth is expected to diffuse the price pressure and leave the GDP price index up just 2.2% this year and next, down from a 2.7% rise last year and 3.2% during the prior two years.

The commodity price series in the table below can be found in Haver's WEEKLY database

Current Events in the Economy and Financial Markets is last week's speech by Sandra Pianalto, President and CEO Federal Reserve Bank of Cleveland and it can be found here.

Commodity Prices Latest Week February January February '07 2007 2006 2005
 Industrial Metals
   Aluminum ($/ Metric Ton) 1.30 1.23 1.10 1.26 1.18 1.18 0.89
   Stainless Steel Scrap ($/Ton) 2,961 2,603 2,570 3,156 2,786 2,918 1,268
   Copper Scrap ($/lb) 3.70 3.57 3.20 2.61 3.06 3.04 2.28
 Foods
   Milk (Cents/lb.) 130 140 158 145 173 98 95
   Beef Carcass (Index Value) 133 138 139 139 141 136 136
   Corn ($/bushel) 5.10 4.88 4.54 3.87 3.49 2.41 1.90
   Wheat ($/bushel) 8.69 9.82 8.44 4.30 5.91 3.78 3.21
 Light Sweet Crude Oil, WTI ($/bbl.) 104.2 94.9 93.4 58.5 72.2 66.1 56.6
 Gold, Handy & Harmon ($/oz.) 926.8 1,006.8 916.4 884.0 810.5 628.7 507.4
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