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Crude oil hit a record of $135.09 a barrel on May 22, then dropped 9.4% over the next nine trading days to close at $122.30 on June 4. Then it soared past its previous record to $138.54 on June 6 on a plunge in the U.S. dollar.
Besides dealing an expensive lesson to all those traders who bet that oil would fall from $122 to $110 or lower, the temporary drop in oil prices carried a frightening message to consumers:
Don't expect to see any drop in the prices you pay at the pump -- or at the grocery store or anywhere else -- from any decline in the price of commodities. The price of gas at the pump actually climbed to a new high at $3.983 a gallon last week, according to automobile club AAA, even as the price of oil was falling. (And it kept on climbing, to $4 a gallon, on June 8 after a two-day rally in crude oil prices.)
You can expect the same from other commodities that have tumbled in price. Consumer prices will stay high even as commodity costs come down. Wheat prices are down. From a record $13.95 a bushel on Feb. 27, the most actively traded contract on the Chicago Board of Trade had dropped 42% to $7.78 a bushel on June 5. The prices of most other commodities -- well, except for corn, which has soared as heavy rains have held up planting -- have tumbled in recent weeks. See any drop in the price of bread or in a meal at your favorite restaurant?
No, and don't expect to. There's no quick relief coming to consumers even if commodities continue -- or resume, in the case of corn and oil -- their retreats in prices.
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And investors are likely to share consumers' pain. Commodity inflation will take a big bite out of earnings when companies from McDonald's (MCD, news, msgs) and PepsiCo (PEP, news, msgs) to Caterpillar (CAT, news, msgs) and Hewlett-Packard (HPQ, news, msgs) start to report second-quarter numbers in July, even though commodity prices are now in retreat.
So why aren't the prices you and I pay about to come down with the declining costs of wheat, oil and many other commodities?
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Part of that is business as usual, cynical consumers know. Prices go up more readily than they come down. Sellers of goods and services try to retain as much of a price increase as they can, even when the reason for the price increase has vanished. Only gradually does falling demand or price cutting by competitors roll back higher prices.
Part is the typical time lag that exists before prices in the commodity market work their way down to wheat millers, oil refiners and meat producers. For example, oil refiners are still refining the oil they bought three months ago at $102 a barrel. So over the coming months, as refiners work their way through the $102 barrel oil in their storage tanks, they'll gradually start refining $110- and then $120-a-barrel oil.
Hot and lukewarm
But one reason that high prices are going to be so sticky this year isn't so familiar. It's a result of the way the global economy and the U.S. economy are so out of sync right now.The global economy is going gangbusters. China's economy is growing at better than 10% so far in 2008. India is growing at 8%. Russia at 7%. Even the Eurozone is chugging along at almost 2% growth. That's faster than a speeding bullet for those economies, and all this growth has fueled extraordinary jumps in commodity prices.
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Why you didn't get a raiseCorporate profits are down 6% from their peak. But instead of that cash flowing to US wages, it's headed overseas to pay ever more expensive commodities, Jim Jubak says.
At the same time as a scorching global economy keeps the price of commodities boiling, growth in the U.S. economy has gone tepid. In the first quarter of 2008, the U.S. economy grew just 0.9%. Right now it looks like real growth (discounting inflation) for the full year will fall somewhere between 1% and 2% above 2007 levels -- certainly not a recession but very slow growth nonetheless.
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