With commodity prices retreating globally, pressure on jewelry prices has abated, both at the production level and at retail.  Earlier this year, jewelry prices spiked as higher gold, silver, and platinum prices pushed up manufacturing costs.  However, in recent months, inflation has moderated significantly, though it is likely that jewelry prices – both at the retail and production level – will be up for the year.

 

In September, jewelry producer prices rose by a moderate 6.7 percent, nearly a full point below the price gain in August.  While a price rise of 6.7 percent is high by historic standards, it is still well below the 11.5 percent price spike in the spring of 2006. 

 

The graph below illustrates monthly Jewelry Producer Prices.

 

Source: BLS

Globally, falling energy prices also undermined prices of other commodities.  For example, gold prices have moved lock-step with declining oil prices. 

 

When viewed from afar, the current commodity cycle may be signaling the end of a global “super-cycle.”  There appear to be at least four factors which have had an impact on producer prices, including the following:

 

·        Giant investment funds have been major players in many commodities markets.  They follow the trend, rather than taking a rational approach to investing.

 

·        Several years of high commodity prices have created consolidation in the industry, resulting in giant resource companies with substantial pricing power via capacity constraints and other tactics. 

 

·        History has shown that commodity prices generally move in the same direction as interest rates, with each cyclical price wave typically reaching its peak about the same time as the global interest rate cycle. 

 

·        Emerging economies – China, for example – have disrupted normally orderly demand cycles and pushed prices skyward. 

 

Despite all of these upward pressures on commodity prices, “real” commodity prices – deflated by U.S. CPI, have been falling for the past 50 years. 

 

Consumer Jewelry Prices Moderate

Following the lead of all consumer prices, which dipped in September, retail prices for jewelry also showed a substantially smaller gain in September.  For the month, retail jewelry prices rose by a very modest 1.9 percent, as the following graph illustrates.

 

Source: BLS

It appears that the Federal Reserve’s prescription to rein in inflation is working.  For all consumer categories, prices fell by 0.5 percent in September, led by a sharp decline in energy prices.  Core CPI, excluding food and energy, rose by a very modest 0.2 percent for the month (or about 2.4 percent on an annualized basis), well within the Fed’s target range. 

 

As a result of moderation in all consumer prices, it is likely that the Federal Open Market Committee will hold the fed funds rate steady near term. 

 

Outlook – Inflation to Continue to Moderate

As a result of slowing global economic growth, we expect prices at both the producer and consumer level to moderate further, both in the final months of 2006 as well as into 2007.  By late 2007 and early 2008, U.S. CPI should settle in a range of 2 percent or less, annually. 

 

The inflation news is particularly good for jewelers, as the U.S. and Western Europe enter into the all-important holiday selling season.  With energy prices much lower, and wage gains continuing – though at a slower pace – we believe that consumers will have ample discretionary income to spend on luxury goods such as jewelry.