When news commentators start gabbing about commodities like soybeans and pork bellies, do you feel like they might as well be speaking ancient Sumerian? Just for once, wouldn't you like to hear in plain English how all this commodity stuff applies to you?

Believe it or not, it does - especially nowadays.

IN PICTURES: 10 Tips For The Successful Long-Term Investor

Raw Materials
"Commodities" is a catchall term for the raw materials that manufacturers and investors buy and sell on futures exchanges. In addition to soybeans and cotton, commodities include items like oil, wheat, coffee, beef, industrial and precious metals and oranges. Even bandwidth and carbon emissions credits have been considered commodities.

Since so many commodities go into the everyday products we buy, commodity prices factor greatly into how much we pay for things. For instance, if wheat prices spike, you can bet the prices of cereal, bread and other wheat-containing products will soon follow suit.

Rising Demand
Commodities are especially critical now because demand for them has never been greater. Gone are the days of the U.S., Japan and Western Europe gobbling up the lion's share. Now China, India and other fast-growing economies crave commodities just as much. Since supplies are limited, price hikes are the most likely outcome. That's just basic economics. (To learn more, see our tutorial Economics Basics: Introduction.)

The price of wheat, for example, has jumped by almost two-thirds on futures exchanges since June. Many other commodities have also risen substantially in price over the past year including coffee, tea, oranges, beef and sugar.

Effect on Retail
In the face of rising commodity costs, manufacturers often have only one choice if they want to keep making money - pass on the higher costs to you by charging more at the register. And they're planning to do so.

Food makers like Nestle (OTC: NSRGY) and Kraft (NYSE: KFT), for example, recently forewarned of possible higher prices at the supermarket. You may have noticed that Starbucks (Nasdaq: SBUX) and Dunkin' Donuts are already charging more for your favorite cup of Joe, and that Sara Lee (NYSE: SLE) has upped its bread prices. Meanwhile coupons, discounts and other types of price concessions on food are starting to disappear.

There's a similar situation in the clothing industry. Because of rising cotton prices, which have just about doubled this year, retailers such as Walmart (NYSE: WMT) and J.C. Penney (NYSE: JCP) are expected to substantially raise clothing prices by next year.

IN PICTURES: 10 Ways To Cut Your Food Costs

If you're thinking that all this sounds like good old-fashioned inflation, you're right. Inflation is especially common after a financial crisis like the one we had a couple years ago, and many economists have been predicting a long period of major inflation for some time.

That's partly because the government has been printing hoards of money to help fund economic remedies for the crisis. Along with rising commodity prices, excessive money printing contributes to inflation by expanding the money supply so much that dollars lose value.

How to Cope
There's not much anyone can do to stop rising commodity prices or inflation; they're part of the economic cycle. There are things you can do to cope, though, such as realizing your paycheck won't go as far and taking extra steps to economize.

You can also re-evaluate your investment strategy. Does your portfolio contain a reasonably healthy portion of stocks, either individually or in mutual funds? If not, consider beefing up on stocks, because they've consistently outpaced inflation over time - and there's no indication they won't continue to do so. (To learn more, check out our Inflation Tutorial.)

Related Articles
  1. Economics

    Why It Is Important to Follow Crude Oil Inventories

    Discover what oil inventories are, how they are communicated and what important insights they provide into the state of the oil market.
  2. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  3. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  4. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  5. Mutual Funds & ETFs

    The Democratization of the Hedge Fund Industry

    The coveted compensations of hedge fund managers are protected by barriers of entry to the industry, but one recent startup is working to break those barriers.
  6. Retirement

    Two Heads Are Better Than One With Your Finances

    We discuss the advantages of seeking professional help when it comes to managing our retirement account.
  7. Professionals

    A Day in the Life of a Hedge Fund Manager

    Learn what a typical early morning to late evening workday for a hedge fund manager consists of and looks like from beginning to end.
  8. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  9. Mutual Funds & ETFs

    American Funds' Top Funds for Retirement

    Planning for retirement in this economic and investment environment is far from easy. American Funds might offer an answer.
  10. Investing Basics

    5 Tips For Diversifying Your Portfolio

    A diversified portfolio will protect you in a tough market. Get some solid tips here!
  1. Do plane tickets get cheaper closer to the date of departure?

    The price of flights usually increases one month prior to the date of departure. Flights are usually cheapest between three ... Read Full Answer >>
  2. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  3. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
  4. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  5. Does OptionsHouse have mutual funds?

    OptionsHouse has access to some mutual funds, but it depends on the fund in which the investor is looking to buy shares. ... Read Full Answer >>
  6. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center