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If it feels like the cost of living is on the rise, you’re not imagining it. When the Bureau of Labor Statistics released its consumer price index data for December, it revealed a monthly increase of 0.02% and an uptick of 2.3% for 2019.
That was the biggest annual increase since 2011.
The consumer price index tracks changes in price for a bundle of goods and services that consumers routinely purchase. It is a gauge of changes in Americans’ cost of living, which also serves as a measure of inflation.
Prices of goods can rise or fall for a number of reasons, including the cost of inputs, such as the underlying commodities used to produce food or manufacture goods. Some investment analysts are now eyeing commodity prices, to see if those will drive inflation in 2020.
“I would expect prices to rise in the 1.5% to 2.5% range, which is in line with inflation in the last four years,” says Larry Israel, president of Exchange Analytics, a company that provides online compliance training courses for the futures/derivatives and securities industries, in Chicago.
“In 2020 we may experience higher inflation rates in the energy sector depending on geopolitical factors,” he adds. “However, food prices should remain relatively stable and I would expect the overall inflation level to remain subdued.”
If the Federal Reserve becomes concerned that inflation is rising too rapidly, it has several tools at its disposal. It may increase banks’ reserve requirements, thereby reducing the amount of money in circulation. It can also increase the discount rate, making it more difficult to borrow money.
These actions slow the economy’s growth, which in turn pushes prices down.
“Economic growth remains steady and does not appear to be in danger of overheating, while interest rates remain historically very low,” Israel says. “While the labor market appears relatively tight, I would expect real wages (wage increases less inflation) to only increase modestly because the underemployment rate (adults who are either unemployed or working part time when they want full-time jobs) is almost twice the unemployment rate right now.”
Carley Garner, commodity broker and strategist with DeCarley Trading in Las Vegas, says commodity prices on the whole have not been rising lately.
“Aside from a few outliers such as precious and industrial metals, commodities, in general, have been in a multiyear slump. This is evident by looking at commodity indices such as the Bloomberg commodity index, which is hovering near 80, a mere 10% off all-time lows but a far cry from the all-time-high near 240 posted in 2008,” she says.
Garner says the market may never return to those levels, which saw crude oil hovering near $150 per barrel, and prices of agricultural goods such as corn and soybeans also skyrocketing.
However, she says, prices are “likely to forge a comeback sooner rather than later.”
Garner adds, “In reference to the prolonged bear market in commodities, analysts like to talk about the oversupplied energy, grain and softs markets in addition to demand destruction at the hands of changes in consumer behavior and the U.S.-China trade dispute. However, a more logical explanation might simply be due to changes in the currency markets. As the U.S. dollar strengthens, commodity prices tend to weaken and vice versa. This is because U.S. commodities are seemingly more expensive and, therefore, less attractive to overseas buyers at a time in which the dollar is high.”
Garner points to the link between a strong dollar and high commodity prices. She cites the dollar index, which tracks its value against a group of other nations’ currencies.
“The greenback made a massive run in 2014 and 2015, taking the dollar index from the low 80s into triple digits eventually peaking near 103 in 2016,” she says. “Since the initial run toward 100, the index has spent most of the time hovering in the high 90s, which is a historically high valuation and acts as a weight around the neck of the commodity market. Not surprisingly, the commodity markets suffered appreciably during this time.”
In 2016, she says, as the dollar was near peak levels relative to other currencies, prices for oil and natural gas dropped sharply.
“In short, if the dollar eventually softens as history suggests, commodities could move back into the spotlight,” she says. “Further, the spread between stocks and commodities is historically stretched. In the big picture, the odds suggest either commodities should firm up, stocks should weaken, or a little bit of both to bring the relationship to a more reasonable status.”