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Rising Commodity Prices with Lauren Saidel-Baker

June 25, 2021

 

 

 

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Transcript by Rev

Lauren Saidel-Baker:
Hi, I'm Lauren Saidel-Baker. And welcome to this episode of ITR Economics Trends Talk.

I used to have a coach in high school, and he liked to say, "Act like you've been there before." Now I love sports psychology. And I thought this was a great point, that no matter where you are, whether you just hit a home run for the first time, maybe it's your first time standing in the end zone, there's a power in exuding the confidence that it might not be your first time, that you've been there before.

Today, I hope we can apply this concept to something that is causing a lot of consternation in the business world, and that is rising commodity prices. We are hearing this concern from all over the industrial sector. Commodity prices are rising, largely, across the board. And that's causing some strain, especially on margins. Moreover, it's causing problems in just general business decision-making.

Now I won't quote every different commodity price metric out there, but just as a general barometer. Let's look at copper future prices. That's a pretty middle-of-the-road industrial commodity used in many different applications. And if we look at copper prices in the past three months, that average was 88% higher than it was a year ago. 88% is a huge 3.12 rate of change. And if we only have our narrow scope in our time horizon, if we're only looking at a few years of data, you will see that as the highest number on that chart. But if we open up our timeframe a bit, expand that scope and really put this number in context, you'll note that rates this high have in fact happened a handful of times in the past few decades.

Now if you personally have been here before, largely depends on the length of your career. It's important to find the relevant input cost, the most relevant data for your business. You can do that through any number of sources, or our website, itreconomics.com, and you can see: have your relevant commodity prices been this high on a rate-of-change basis, wherever your career started?

Now full disclosure, I personally have not been here before. I was still at Wellesley College the last time the copper future prices 3.12 was this high. But that's not what matters. I can track the historical data. I can see that growth does still occur during this part of the cycle. And I can certainly act that I've been here before.

I also do want to note that there is a lot of compelling leading indicator evidence suggesting a peak in many of these growth rates in the near term. We've seen a tentative peak in the US Purchasing Managers' Index, similar trends in many indices out of China, which is a major consumer of global industrial economies. Both the China Purchasing Managers Index, the China leading indicator, many of these leading indicators all have about a quarter or so of lead time to many industrial commodity cycles. So that means we should be able to expect a peak somewhat in the near term, at least in the rates of change.


So what does this mean for you? Well first, don't lose sight of where we all are already. Prices are up. And they are certainly likely to stabilize at higher levels. Even if we see a peak in the growth rate, that doesn't mean that prices themselves are retreating to the level that they were, say, 6 to 12 months ago. So if you haven't passed along price increases yet, take a look at your profit margin and it's probably time to be aware and be careful. But overall, take comfort in the fact that we have been here and the world kept turning last time this happened.

Now if you personally have lived through a cycle like this, I hope this episode served as a reminder of that fact, the fact that you can look back, see what you did then and, more importantly, what you wish you had done. But critically, be an example. Not all of us have lived through this before. Us younger folks would love that reassurance that this does happen, it is a regular business cycle occurrence, and we'll be okay on the other end.

Now if, like me, you haven't necessarily been here, if this is your first time standing in that end zone of inflation, don't worry. The data's been here, and we can at least act it.

For this episode of ITR Economics Trends Talk, I'm Lauren Saidel-Baker. Let's talk more soon.

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Since 1948, we have provided business leaders with economic information, insight, analysis, and strategy. ITR Economics is the oldest privately held, continuously operating economic research and consulting firm in the US. With a knowledge base that spans six decades, we have an uncommon understanding of long-term economic trends as well as best practices ahead of changing market conditions. Our reputation is built on accurate, independent, and objective analysis.