IDEX Online Research: U.S. Jewelry Prices Soar in February

Retail prices for jewelry in the U.S. are surging. On a year-over-year basis, retail jewelry prices rose by 9 percent in February, after posting large gains in the 5-6 percent range for most of the final months of 2006. These soaring inflation numbers come after years of price deflation for retail jewelry in the U.S.

IDEX Online Research believes that virtually all of the retail price inflation affecting jewelry is related to sharply higher commodity prices in 2005 and 2006 that are finally working their way through the distribution pipeline.

While higher jewelry prices are generally good for retailers since it will help them stabilize – or even recover – their margins, a significant rise of 9 percent in retail prices could be enough to cause consumers to shop for alternative products. With inflation affecting energy prices – gasoline prices are on the rise again, and are expected to rise to near $3.00 per gallon later this spring – consumers will be curbing their spending on discretionary purchases. If retail prices of discretionary items also rise, it is likely that jewelry demand will lag.

Jewelry CPI Up Sharply

Retail prices for jewelry, as measured by the U.S. Department of Commerce’s Jewelry CPI (Consumer Price Index), rose by 9.0 percent in the month of February. Two key factors drove jewelry CPI: 1) dramatically higher precious metals prices; and 2) pent-up margin pressure that has finally forced jewelers to raise prices in an effort to boost sagging margins.

The graph below summarizes monthly Jewelry CPI since the beginning of 2006.

While jewelry prices have continued to rise, inflation for most other retail products has moderated. Energy prices have been volatile, and they have masked the underlying slowing of price increases among all retail commodities in the U.S. This trend of slowing inflation will probably keep the Fed from raising interest rates.

Producer Prices for Jewelry Moderate

Producer prices for jewelry were quiet in February, posting only a moderate increase. For the month, producer prices rose by 3.7 percent, the same level as January, and well below any month in 2006. For the moment, precious metals prices seem to have stabilized. As long as precious metals prices are stable, IDEX Online Research believes that retailers won’t likely see large price increases from their suppliers this year.

The graph below illustrates the Jewelry Producer Price Index, as reported by the U.S. Department of Commerce.

Outlook: Moderate Inflation in 2007

IDEX Online Research believes that the bulk of the cost increases for the Jewelry PPI are behind us. Thus, most of the price increases that are flowing through to the Jewelry CPI are due to last year’s sharp commodity price increases. At some point, probably in the first half of the year, retail price increases for jewelry will moderate. That should take some of the dampening impact off jewelry demand.

Overall inflationary pressures for all U.S. goods are expected to weaken in 2007 as overall economic growth remains below potential, due to continued weakening in the housing market as well as softness in the manufacturing sector, particularly automotive production. Lower energy prices will also provide some relief, particularly for topline inflation.

Core inflation for all retail categories will likely post monthly gains of about 0.2 percent in 2007. In our opinion, core inflation has peaked, and will gradually slow through the year as below-potential economic growth reduces price pressures.