The various items we purchase can generally be broken down into one of two categories, goods or services. A good being something tangible, such as a car or television, and a service being something like receiving a haircut, or paying college tuition.
When we purchase a tangible good, the main costs are the materials and labor. For example, both the material and labor costs of an automobile are quite significant.
Automotive repair is considered to be a service. This service does comprise of a combination parts and labor. In some cases the cost of the parts, such as obtaining new tires is the most significant cost. Other times, labor may be the largest aspect of the bill. For most other services, the cost of goods used in providing the service is not that significant.
For food items prices for fruits and vegetables can change dramatically based on the underlying cost of the product. For an item like cereal, the actual cost of the raw material is fairly insignificant. That is why changes in grain prices have little impact on the price consumers pay.
The price of gasoline is a product consumers are very familiar with. On a national basis consumers are paying about a $1 less per gallon of gas versus last year. In California the savings are considerably less due to refinery issues, and our more stringent environmental standards.
Commodities also play a role in the cost of building a house. The main costs for a house are land, materials, and labor. In our local area land is by far the most dominant cost. That is why, with the price of lumber and copper coming down, the cost to build a home is still increasing.
Recently the price of commodities has been declining across most categories. Obviously oil is the most noticeable to consumers, but the price of gold, silver copper, and iron ore have all registered significant declines. Agricultural commodities have also fallen in price, though weather can oftentimes have a disproportionate impact on this category.
There are several reasons to account for the decline in commodity prices. The economic slowdown in China is certainly a major cause. When commodity prices were starting their ascent, about 10 years ago, China was a major contributor. Likewise, it is having a major influence now, as prices have come down.
The strength of the U.S. dollar also plays a major role in lowering commodity prices. For example, in Europe the price of commodities has not fallen to the extent that they have in dollar terms, because the Euro has declined in value. An increase in supply has also impacted commodity prices, with the best example being the rapid rise in oil production in the U.S.
When we look at inflation data it is comprised of both goods and services, with services being the largest category. The cost of most services continues to increase, whether it be rent, education, medical care, entertainment, or repair bills. However, the decline in commodity prices is providing enough of an offset to keep the reported inflation numbers quite low.
If you look throughout history, commodity prices tend to be quite volatile both on the upside and the downside. Recently financial markets have become concerned that falling commodity prices are a sign of slowing global growth. Those countries that are major exporters of commodities are certainly being impacted.
Lower commodity prices are a benefit to consumers. Therefore, while producers in the energy and mining industries are being hurt, everyone else tends to benefit. Most likely the bulk of the decline in commodity prices has already occurred. However, for the time being, volatility may remain higher than normal for both commodities and the stock market.
