Six months ago, we were worried about rampant price inflation for jewelry, both at the consumer and the supplier level. While the current levels of jewelry price inflation are still well above the norm for the past two decades, it is clear that price increases have moderated substantially.

 

If anything, we are now beginning to worry about jewelry price deflation. Many other commodities are experiencing deflationary pricing, and it is likely that jewelry prices will fall from current levels. This would not be unusual; after all, jewelry prices have fallen more often than they have risen over the past decade.

 

As demand continues to soften and upstream prices weaken, we expect that jewelry prices at both the supplier and retail levels will moderate significantly in 2009.

 

December Inflation Rates

Here’s the summary of inflation at the jewelry retail and supplier level for the month of December, as expressed as a percentage change year-over-year (December 2008 versus December 2007) in the U.S. market:

 

• Jewelry Producer Price Index +1.9%
• Jewelry & Watch Consumer Price Index +6.9%
• Jewelry CPI +7.5%
• Watch CPI +3.3%

Full Year 2008 Inflation Rates

Jewelry price inflation at both the supplier and retail level in the U.S. market for the twelve months ended December 2008, expressed as a percentage change year-over-year, was as follows:

 

• Jewelry Producer Price Index +6.3%
• Precious Metal Jewelry +7.2%
• Jewelry & Watch Consumer Price Index +6.9%
• Jewelry CPI +8.0%
• Watch CPI -0-%

Based on long term trends, jewelry price inflation at the supplier level and the retail level in 2008 were well above the norm. For the past two decades, the Jewelry Consumer Price Index (JCPI) has risen at an annual rate of about 1.6 percent, while the Jewelry Producer Price Index (JPPI) has risen at an annual rate of about 1.5 percent.

 

Outlook: Possible Price Deflation?

Our original forecast for price inflation during 2008 at both the supplier level and the retail level was +7 percent. Now that the year has ended, it is clear that this forecast was reasonably accurate, despite monthly volatility during the year.

 

Our outlook for jewelry price inflation for 2009 is clouded by several factors:

 

• As long as retail demand is soft, retailers won’t be able to raise prices. In an effort to entice consumers into their stores, they are likely to cut prices. This will produce price deflation.

• Most commodities prices have fallen substantially in recent months. However, a large portion of these lower prices have yet to flow through the distribution pipeline. So, in theory, goods should be less expensive at the manufacturing and supplier level next year. This will result in price deflation.

• The global recessionary environment will have a negative impact on any attempt to raise prices anywhere in the distribution pipeline. This will likely contribute to price deflation.

• Gold has not been a “safe harbor” in the current recessionary environment. Historically, investors moved their cash to gold as a “safe harbor” to avoid losing money in the stock market or real estate market as well as to protect themselves from some currency fluctuation.

What this means: the jewelry industry could return to deflationary pricing in 2009. During the ten-year period between 1996 and 2005, jewelry prices declined nine years. During the single year – 2004 – that prices rose, it was up a miniscule +0.6 percent (less than 1%).

 

The graph below illustrates a possible jewelry price deflation scenario for 2009, especially since the industry headwinds are being driven simultaneously by four factors (listed above). The decline of 3 percent in jewelry prices is more of a guesstimate than a solid forecast, but represents directionally the likelihood of jewelry prices at retail this year.

 

Source: BLS & IDEX Online

 

Jewelry Producer Price Index (JPPI) +1.9% in December

 

There is still a backlog of high-cost goods in the distribution pipeline that suppliers need to pass on to their customers. But the good news is that the pressure is off – suppliers’ costs have moderated, so they aren’t being forced to continue to raise prices in the face of a weakening environment of consumer demand.

 

We believe that suppliers will likely hold off on any significant price increases near term for one key reason: retail jewelers simply won’t accept higher prices in the current recessionary environment.

 

Because the wholesale community is so fragmented, no one supplier has pricing power. We’ve already seen some panic pricing by suppliers who are trying to move goods – at a loss, if necessary – to raise cash. In that kind of environment, any supplier who tries to raise prices will lose business.  

 

The following graph summarizes the monthly Jewelry Producer Price Index for inflation since the beginning of 2007. The percentage figures are based on year-to-year comparisons of the BLS Jewelry Producer Price Index.

 

Source: BLS

 

What is behind the recent decelerating pace in the Jewelry Producer Price Index? Prices for both precious metal jewelry and gemstone jewelry have moderated. The graph below compares the JPPI (red bars) to inflation for precious metals (gold bars); gold has been the primary driver of precious metals inflation, until October.

 

Source: BLS

 

We note, further, that producer price inflation in December – +1.9 percent – was dramatically below the retail price inflation rate for the entire jewelry category of +6.9 percent. Earlier this year, producer prices in the precious metals category rose more than the corresponding retail prices. Now, retail prices are catching up, though it appears that inflationary pressures at the retail level have moderated significantly. However, these trends illustrate the lag effect – 3-5 months – between rising producer prices and the resultant rising retail prices.

 

Full Year JPPI +6.3%

For the full year, jewelry supplier price inflation for jewelry in the U.S. market ran at an annual rate of +6.3 percent. The graph below puts last year’s producer price inflation rate into perspective.

 

Source: BLS

 

Jewelry Consumer Price Index (JCPI) +6.9% in December

 

We believe that jewelry retail prices rose sharply early in the year as retailers re-priced goods to reflect pent-up inflationary pressures from their suppliers. Virtually all of the chain jewelers have raised prices, one way or another. In addition, most independents have re-priced their inventory to reflect current precious metals and gemstone prices.

 

While there has been some inflation volatility on a month-to-month basis during 2008, the trend for the past several months is quite clear: jewelry price inflation at the retail level is moderating, though it is still running well ahead of its two-decade annual gain of about +1.6 percent.

 

The graph below summarizes the percentage change in retail prices of jewelry and watches by month on a year-to-year basis since 2007. The percentage change is based on a comparison to the same month a year ago (December 2008 versus December 2007).

 

Source: BLS

 

Earlier this year, the components of jewelry and watch price inflation at the retail level reflected a disparity in price increases. Jewelry retail prices were up consistently during the first half of 2008, but watch retail prices showed virtually no price inflation. In the past few months, watch price inflation has steadily increased.  

 

In particular, watch prices have risen sharply for the past three months, when compared to the prior months. We are not surprised; the only surprise is that watch price inflation lagged so much early in the year. Why? There are two key reasons: 1) mechanical watch mechanisms from Switzerland have been in short supply due to manufacturing capacity constraints; and 2) demand for high-end watches and branded watches has been relatively strong, according to retail jewelers. However, during the holiday selling season, demand for high-end watches was generally weak at retail. In particular, jewelers tell us that Rolex watches sat in their showcases, and consumers didn’t ask for this prestigious brand in the current recessionary environment. Our forecast calls for significantly moderating price inflation for watches in 2009 – in fact, price deflation will occur, in our opinion.

 

The graph below illustrates the JCPI consisting of both jewelry and watch prices (green bars), jewelry prices only (red bars), and watch prices (yellow bars).

 

Source: BLS

 

Outlook: Price Deflation in 2009

After rising by nearly 7 percent in 2008, we are forecasting price deflation for jewelry in 2009. Our current prediction calls for 2009 price deflation to be in the low single digit level, but because it is so early in the forecast cycle, we’d call this little more than an educated guess tempered by historical trends.