The U.S. Jewelry Producer Price Index (PPI) soared in May, rising by 11.5 percent versus the same period last year. This is the largest monthly gain on record since the PPI (on the current base) was initiated in 1981.

 

Retail prices of jewelry in America have also begun to climb, though not as steeply, as higher cost merchandise has finally reached the downstream end of the jewelry pipeline. The Jewelry Consumer Price Index rose 3.2 percent in May versus the same month last year. This was the second consecutive month of notable price increases for jewelry at retail.

 

All Commodity Prices Up

U.S. Fed Chairman Ben Bernanke has said that he is worried about inflation in America. We can only hope that he does not look closely at jewelry statistics: he’d be really worried. In May, the Jewelry PPI for “jewelry and jewelry products” posted the largest gain – +11.5 percent – since the government began keeping records (on the current base) twenty-five years ago.  

The graph below summarizes monthly Jewelry PPI for 2004, 2005, and 2006 year-to-date through May.

 

Source: BLS

 

Price increases among core intermediate products – such as jewelry and jewelry components – are often considered a leading indicator for consumer price inflation. Thus, the current trends are troubling, because prices have been rising for a wide range of firms throughout the U.S. economy.

 

Up until now, most manufacturers have been able to avoid passing along all of their increased costs to retailers. However, rising component costs coupled with higher wage costs have become too large for producers to absorb internally. As a result, producer prices are rising sharply.

 

Rising Gold & Platinum Pushing Jewelry Costs up

Worse, the PPI for “jewelry, platinum and karat gold” rose by a dramatic 13.6 percent in May, by far the largest gain on record. It should be no surprise that jewelry production costs are up. After all, precious metals prices soared earlier this year, prior to a pull-back in mid-June. These cost increases were in line with producer prices for all U.S. “core crude goods,” which rose for the fourth consecutive month. Even scrap metal prices rose sharply in May. 

The graph below illustrates the rapid rise in gold prices between May 2005 and May 2006. While karat gold jewelry represents only about 10 percent (by value) of a typical jeweler’s sales, gold used in many other jewelry products such as diamond ring mounts. In total, all gold used in jewelry represents about 30 percent of a typical jeweler’s sales. Thus, as gold prices rise, jewelers’ costs rise on merchandise that generates a large portion of their total revenues.

Source: Commodities Markets

The graph below illustrates the sharp increase in platinum prices between May 2005 and May 2006. Platinum jewelry represents only about 2 percent of a typical jeweler’s revenues. Because platinum prices have been high – especially relative to white gold and silver – many customers have opted for less expensive precious metals to achieve the same “look.” In addition, some jewelers are using palladium as an alternative to platinum because it is less expensive. Palladium prices are currently in the $300 per-ounce range.

 

Source: Commodities Markets

Diamond Prices

Polished diamond prices have shown only a very modest increase over the past 12-month period from May 2005. As the graph below illustrates, polished diamond prices have risen about 3 percent between May 2005 and May 2006.

 

Source: IDEX Online

Retail Jewelry Prices

Jewelers have finally begun to raise retail prices to reflect their rising costs. Until now, most jewelers had avoided raising their retail prices for at least three reasons:

 

• Heavy price-based promotions kept jewelers from raising prices for competitive reasons.
• Because most jewelers turn their inventory only about once per year, they had not received significant levels of merchandise with new, higher-cost commodities until recently.
• Many jewelers are simply averse to raising prices. Over the past twenty years, U.S. jewelers’ gross margins have shown a steady decline because they have failed to raise prices enough to cover steadily rising costs.

As a result of significant flow-through of higher cost merchandise through the jewelry pipeline, jewelers in the U.S. have begun to raise their retail prices. In May, retail jewelry prices rose 3.2 percent over the same month a year ago. This follows a 1.6 percent retail price increase in April for jewelry. Assuming this trend continues, it would be a reversal of prior months – including most of 2005 – when retail prices of jewelry fell in the U.S. market. The following graph illustrates recent monthly trends in retail jewelry prices.

 

Source: BLS

 

Outlook: Price Moderation Ahead

While inflationary pressures remain, the Fed plans to take whatever steps are necessary to fight the fires of inflation. In the U.S., most forecasters are predicting that price increases will be subdued going forward, especially in the face of the probability of higher interest rates, which will dampen economic growth.

 

The problem is that jewelry is a global business, and the Fed can’t fight price inflation of most jewelry components. Too much of the value of those components – raw materials and labor – are added outside of the U.S.

 

However, since the U.S. economy is roughly 30 percent of the global economy, any slowdown in the U.S. will cause a ripple across all of the world’s economies. This could lessen global inflationary pressures.

 

Further, much of the price inflation related to gold and other precious metals has come from financial speculators in the commodities markets. Over the past thirty days, there has been a substantial pullback in precious metals prices. Many forecasters are bearish on gold, at least short term. If precious metals prices were to stabilize now, jewelers’ could look forward to some relief from higher costs just as they enter the all-important upcoming holiday selling season (November and December).