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Home Publications Blogs Beat the Press Commodity Prices Are Soaring Back to 2007 Levels

Commodity Prices Are Soaring Back to 2007 Levels

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Tuesday, 15 February 2011 05:43

The New York Times had a front page story that claimed that companies are being forced to raise prices as a result of rising commodity prices. There are two problems with this story.

First, commodity prices are just returning to their pre-recession levels. The Bureau of Labor Statistics crude goods index stood at 236.1 in December, slightly below the 236.4 level of December 2007 and well below the peak of 301.0 in July of 2008. So, the price pressure from commodities is considerably less than it was at the pre-recession peak.

The other problem with the story is that commodity prices are a relatively small portion of total costs. In principle, companies could easily absorb higher prices, since profit margins are at near post-war highs.

crude_prices

Comments (6)Add Comment
...
written by Ron Alley, February 15, 2011 7:45
Just another in a long line of articles endorsing the policies of the Corporate Party of America and attempting to generate debate between the Party's Left Wing and Right Wing.
And Whose Principle Would That Be?
written by John H. McCloskey, February 15, 2011 7:48
"In principle, companies could easily absorb higher prices, since profit margins are at near post-war highs."

Happy days.
i.e., back to the oil bubble which caused the depth of the recession?
written by pete, February 15, 2011 9:22
Sure seems clear that the oil bubble of 07 08 was a disaster, though little discussed...long after real estate had begun collapsing. That's a lot of bucks flowing to the Bin Laden family. I guess we are headed back there again.
captcha says 'engrne utopias'; is that an r+n or an m? please make captcha go away!
written by ted bundy, February 15, 2011 10:53
Dean Baker believes ordinary workers, such as myself, are suffering due to chronically high unemployment/low compensation, where many employers, such as mine, have instituted wage freezes going on their 3rd year and project them into the forseeable future (I value working for a public library).

Yet, Dean wants the Federal Reserve to target an inflation rate of 4-5%. Just imagine, were the FED successful, what this would do to my real earning power/standard of living. Give up? I would be royally fucked up my starburst asshole, that's what!
...
written by PeonInChief, February 15, 2011 2:15
Perhaps is just another version of "buy now or be priced out forever."
Managed Money is the Problem
written by JJTV, February 16, 2011 4:57
Largely ignored once the recession began was the effect that managed money (Pensions, hedge funds, etc) had on driving the prices of commodities to unsustainable levels. The main organizations behind the rise in commodity prices were not be end users of the products they traded. There are recent cases of commodity market manipulation including the monopolization of all TET propane by British Petroleum in 2004. In 2007 BP was forced to pay $303M in penalties and restitution. The largest rise in commodity prices took place between 2004-2008 (many economists believe it was the largest rise in commodity prices in the history of the world). This was right around the time that commodities were being considered a diversification tool for investment portfolios and the belief was backed up by the CFTC in 2007. The large movement of index speculators into the market starting in 2001 eventually led to the bubble that occurred between the years 2006-2008. For a comparison, the total increase in Chinese oil consumption between 2003-mid 2008 was 920 million barrels, while index speculators increased their holdings by about 848 million barrels over the same period. Index speculators hold even larger portions of the market for other commodities. The total volume of futures contracts purchased between Jan.1 2003 and March 2008 increased by approx 5 million; approx. 2.7 million can be attributed to index speculators and 1 million by hedgers. In 2004 there was approx $50M in commodity index funds and by 2008 there was $300M. In the first two months of 2008 $55M poured into the commodities markets from different sources of managed money. The commodity markets are small in comparison to forex, bond, and equity markets. Allowing managed money and speculation in commodity markets distorts the functions of the market and puts undue burdens on the lowest classes of Americans and citizens of other foreign countries. There is no place for managed money in markets that provide food and energy to the world.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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