Reporting Commodity Price Swings

Stories often lead readers to believe inflationary impact is greater than it really is

Bloomberg shouts this headline today about commodity prices going up:

Gap, Wal-Mart Clothing Costs Rise on ‘Terrifying’ Cotton Prices

Its lede says the companies “may” have to pay 30 percent more for clothing because of the soaring prices.

I think that may lead many readers to see signs of rampant inflation everywhere, especially in the days after the Fed said it would print more money. I’ve noticed this quite a bit lately, so here are a few things to take into account about commodities:

They’re often a very small factor in what the end consumer ends up paying. A sharp rise in commodity prices does not mean consumer prices will go up anywhere near the equivalent amount.

For instance, Bloomberg reports:

Closely held Tianlong ships 80 million yuan of clothes to Europe, North America and Japan annually, and raised the price of T-shirts it sells to Ralph Lauren to $4 each, from $3.20 in July, he said.

A Ralph Lauren T-shirt goes for 30 bucks at Macy’s. If Macy’s has to charge a dollar more to recoup its eighty cents, that’s a 3 percent increase, even though what it paid for the shirt went up 25 percent.

This story made the front of the New York Times business section two weeks ago modestly headlined (no “terrifying” here) “Cotton Clothing Prices to Rise.” That lede said “consumers be warned: cotton clothing will be getting more expensive,” but it didn’t do a very good job of putting it in context:

The Bon-Ton chain is raising prices on its private-label fashion items by as much as a dollar this spring, and prices will go up further next fall. And it is switching from 100 percent cotton in items like sweaters to more acrylic blends. Levi’s says it has already increased prices and may push them further north next year. And Hanesbrands, the maker of Champion, Hanes and Playtex, says price increases will be in place by February, and prices could go up further if cotton prices remain where they are.

Bon-Ton raising prices “by as much as a dollar this spring” is virtually meaningless here. First, there’s the “as much as” which is a red flag that a story is being pumped up. A better measure would have been the average increase. Then we’re left wondering: A dollar increase off what base? Something going from $10 to $11 is a much bigger deal than something going from $50 to $51, obviously. We only find out near the bottom that the percentage increase is 5 percent to 8 percent.

Which brings up another point: Companies love to blame their woes and price increases on outside forces. It’s unclear, but unlikely, that Bon-Ton’s 5 percent to 8 percent price increase is solely due to higher commodity prices.

They’re volatile. They can go up fast and down just as quickly.

Indeed, as of last week, cotton prices had soared by some 80 percent since July. But since, they’ve tanked 12 percent, wiping out some one-third of the increase in just a few days. Bloomberg notes the sharp drop in a story, though it’s nowhere to be found in the one above.

This week, the Journal has a story out headlined: “Farmers: Cotton Will Fall More.”

Meantime, Paul Krugman has an instructive chart here showing commodities’ long-term volatility and why sharp spikes don’t necessarily mean much when they’re followed by sharp downturns.

A corollary to that: Commodity prices are particularly susceptible to bubbles and/or manipulation. This from the New York Times story on November 2:

As prices rose, speculators entered the market, driving prices even higher.

“So far, it has shocked even the most veteran traders,” said Mike Stevens, an independent cotton analyst in Mandeville, La., in an e-mail. “It has resulted in panic buying by mills worldwide in order to ensure that they can keep their doors open.”

It’s somehow almost forgotten, but the CFTC found last year that speculators disconnected from physical commodities were responsible for a “significant” part of the economically devastating runup in oil prices in the summer of 2008.

That’s when commodity prices hit all-time highs just before the financial panic hit in earnest, sending them into freefall.

Commodity prices aren’t necessarily good predictors of future inflation. See summer 2008. We’ve since been hit by disinflation and deflation has been the biggest threat.

As Krugman notes:

So, were all the people screaming about inflation now screaming about deflation a year and half ago? Why not? In terms of level, by the way, the recovery in commodity prices has now brought the overall index about back to where it was in December 2007…

Over those three years, the price of gasoline has soared by … well, actually gasoline is a bit cheaper now than three years ago. OK, but milk … actually, milk prices are down substantially since three years ago. But it’s true: bread has gone up in price.

Like Krugman, it’s my impression (completely unquantified, I concede) that the press is much quicker to trumpet signs of rising inflation than it is to focus on falling prices. Perhaps it’s a psychological quirk: We’re quicker to notice the price of orange juice going up at the grocery store than we are to notice the price of milk going down (or staying the same and being deflated by overall inflation).

But it has political consequences. The inflation argument dovetails neatly with the argument for government austerity. The deflation one tends to call for more government intervention.

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , ,