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.
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"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.
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.
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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.)