Mon, 12 Sep 2011
Recent moderation in commodity prices bodes well for milder inflation and the economy.
Jason Stipp: I'm Jason Stipp for Morningstar.
After a worrisome few months of data this spring, some commodity prices have begun to pull back, which begs the question, "Has inflation peaked?"
Here with me to offer some details on that is Morningstar's Bob Johnson, director of economic analysis.
Thanks for joining me, Bob.
Bob Johnson: Great to be here.
Stipp: So, Bob, we have had some recent data about inflation--the Consumer Price Index--what has that indicated to you and does that give you some sense of whether we've seen the worst of inflation?
Johnson: I think we have, and I want to be clear about it. I think we really have seen the top on inflation, and I think we've gone from 0.5% monthly increase, and then the following month we saw 0.4%, and then the latest month we have data for is May, and that's down to 0.2%, and given what we've seen so far, the number could be even lower for the month of June.
Stipp: So certainly some moderating growth in that inflation rate over the last few months. What is current data telling you about some of the different inflation categories? What can you glean from that?
Johnson: ... A broad range of the commodity complex has come down. In fact, let's start at the very top, if you look at the UBS Commodity Index, which is probably a little less weighted to oil than some of the other indexes, which is why I like it, and it's down about 12% from peak to spring. So, that's a pretty decent number to be down, and as those commodities come in, that eventually moves down final prices that we see in the CPI, so it's little bit of a precursor, if you will.
Stipp: And I know that at the gas pump we've seen some moderation in prices. Are we seeing that there is a significant pullback on the refined products?
Johnson: You can look at a couple of different surveys. The one that everybody can look at every day is the AAA gas price survey, which anybody can get online, and that's gone from high of $3.98 just a month and a half ago to this morning when I looked, it was at $3.61 a gallon. So, that's roughly a 10% decline in a month and a half, and that's a healthy decline. Now we are still above where we were a year ago by a considerable margin, but it's backed way off to the point where maybe I think it will help the consumer.
Stipp: And it's not just the current data that have indicated some moderation in inflation. You also look at some forward-looking measures of where prices might go, and those are also seeming to indicate that inflation might be leveling off here.
Johnson: Yes. Our consumer team has done some great work that correlates the changes in the Producer Price Index--the earliest stage, the raw crude goods stage--and then compares that to what happens to the CPI later. And their correlation suggests that food inflation will peak by July or August at the latest, and then after that, prices will begin to move back down.
And one of the things that their work indicates--and this is something I didn't realize--when we look at raw food prices for the last three months as a trend is minus 10, minus 7, minus 7. So, those numbers are going to begin to work their way through the system--and just like the increases took awhile to work on the way up, they are going to take awhile to work their way through, but it is something that's out there. So, that's one of them.
Stipp: So, potentially good news for your grocery bill coming up in maybe a few months this fall or later this summer.
We also have talked about the supply disruptions due to the Japanese disaster. What is that doing with prices right now?
Johnson: One of the big hurts in the economic data in terms of inflation is the rise in new car prices.
Most people thought last month we might even get as good as a flat CPI number, no growth in inflation whatsoever, but what really blew that forecast was that new car prices were up over 1% and have been now for a couple of months, and the reason is with the supply chain disruptions from the Japanese manufacturers, there's been less supply on the market. Ford has raised their prices three times this year. You've seen incentives now at their lowest level in nine years.
And I think that as Toyota comes back online, some of those prices may come back in, and I wouldn’t be surprised to see them offer maybe even a few incentives to get people back in the showroom again. It was really a large decline. Toyota produced 120,000 cars or so in February, and then it got all the way down to 30,000 cars for the month of May. So a spectacular decline, and it had to have an effect on lot of things and certainly auto supply was one of them, and we saw a couple of pretty large increases, and the category hasn't seen much move at all.
Stipp: So as we begin to see that normalize, then some of those higher prices that we saw in the short-term will begin to work back to what a more normal price level would be.
Johnson: Right. So we've gone from a situation where we had very high inflation that already is looking a lot better, and I've got two things in my pocket going forward in terms of better inflation.
Stipp: Okay. I want to put this in a little bit of a market context, because the market seems to be telling us two things about commodity prices. If they get too high, everyone worries about the consumer's spending power and the loss of wallet share to higher commodity prices and thinks that's going to send consumer spending down into the dumps because the commodities are too high.
Then when commodities pull back and we see commodities correct, there is a concern that there's no growth going on, suddenly there is no demand for commodities--that must mean the world economy is going to slow down, and we're going to go back into another downturn.
So what's the deal with commodity prices? Are they too low? Are too high? What is it actually signaling about demand out there?
Johnson: Well. I think that some of the data would seem to indicate that at least some of the commodity price decline--and some of the increase on the other side--might have been at least just a little speculation. I'm not a big conspiracy theorist. I think we did have supply and demand issues, but you had people trying to balance their portfolios and get some more exposure to commodities and so forth, which tended to inflate some of the normal supply and demand situation.
I think you saw when certain things happen, like they raised the margin prices on a couple of commodities and those products quickly go down. You see the release of just a little bit of oil from the world oil reserve supplies, and you see a large move down in oil prices. It seems to indicate that some of the speculative money may be running for the hills every time there is a little change in demand. So I think that that’s one of things that's going on, and to me it indicates that it may not be such an issue.
And I still think consumer demand through all of this has held up pretty well here in the U.S., and so I’m not terribly worried. I think the U.S. consumer is doing OK and that this is not some type of massive fall-off in demand.
People like to look at things like copper, they like to commodities as an indicator of the strength of the economy. But I keep reminding people, it’s really the consumer that makes the difference, and he’s a little slower, but given how he’s been beaten up on gas and food prices the last three or four months, I am surprised that [the consumer has] grown at all.
Stipp: So based on the data you’re looking at, you think it’s actually pretty good news that we’re seeing moderating commodity prices. You don’t see it as a sign of doom for no demand any more for these commodities?
Johnson: No, absolutely not. I view it as a big positive. My number-one worry for the last year has been consumer incomes not growing as fast as inflation. So now to see the potential for maybe even a month or two of negative CPI is something that has me pretty enthused.
Stipp: All right Bob--thanks for the context and the insights on inflation and commodity prices, and for joining me today.
Johnson: Thank you.
Stipp: For Morningstar, I’m Jason Stipp. Thanks for watching.