From bull to bust: Tracking the plunge in commodity prices, and what it may mean for U.S. inflation

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‘The committee expects inflation to moderate later this year and next year,’ Federal Reserve policymakers said in their post-meeting statement on Tuesday.

We’ve heard that before, but this time the Fed’s optimism may be borne out: Commodity prices, which helped stoke the inflation fires over the last year, are continuing to deflate.

The steep slide in oil prices during the last month has gotten the headlines, for obvious reasons. Oil futures, which slipped 59 cents to $118.58 a barrel today, are down 18.4% since peaking on July 3 at $145.29.

But take a look at the accompanying chart. Natural gas has plunged nearly twice as much as oil since July 3, down 35.4%. Corn is down 32% in the same period. Soybeans have tumbled almost 25%.

Other commodities are down less than oil since July 3, but their percentage declines still are measured in double digits. That’s the case for wheat, copper and nickel, for instance.

The Reuters/Jefferies CRB index of 19 commodities has slumped 15.9% since July 3. That marks the sharpest pullback since the index dropped 19.2% from May 2006 to October 2006.

If raw-materials prices have peaked for now, that will take pressure off companies to raise finished-goods prices. Note that so-called core inflation indexes suggest many companies actually haven’t been able to pass through much of their cost increases over the last year. A pullback in commodities, if it’s sustained, should help keep pass-throughs from happening, particularly in the face of weak consumer spending.

Yes, the real world is more complicated, I recognize. A company that had locked up supplies of raw materials a year ago might still be facing much higher prices if purchase contracts are renewed now. At the current $5.28 a bushel, for example, corn still is up 54% from a year ago.

Even so, month-to-month changes in the consumer price index -- the headlines that scare people when prices are rising -- should face less upward pressure if the commodity bull run has, at least for the moment, exhausted itself. (The longer-term may be another story entirely, if you believe raging bulls like money manager Jim Rogers.)

For now, ‘All that it will take to help stabilize inflation and then bring it lower is for commodity prices to level out,’ said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities, in a recent report. ‘Even at a high level, steady commodity prices would eventually produce a moderation in goods inflation . . . because inflation is determined by rates of change, not by relative prices.’