The price of cotton is up more than 25 percent in the past year, but you can't tell it from the price of a shirt at Jos. A. Bank. And the price of crude oil jumped 50 percent early this year -- but you couldn't tell it from the profits of Crown Central Petroleum Corp.
These two big Maryland companies -- the oil refiner based in Baltimore and the Carroll County-based clothier -- are caught up in a trend that has puzzled people all year.
It is now months after sharp spikes in commodity prices began pushing the inflationary buzz. And even though the Federal Reserve has raised interest rates six times this year, with Fed Chairman and commodity-inflation hawk Alan Greenspan hinting last week of a seventh rate boost, the silence on the inflation front remains near-deafening.
The question is: why?
But other economists say commodities are only a small part of the overall inflation picture, and getting much smaller as economic change dictates that more wealth is generated by thinking and less by fabricating materials. Some even speculate that the days of the tightest links between commodities prices and inflation may be past.
Key fact cited
"The key fact I carry around in my head is that commodities, raw things, account for about 5 percent of the price of things we buy," said Paul W. Boltz, chief economist for T. Rowe Price Associates Inc. in Baltimore. "You can find $3,000 computers that you can pick up with one hand."
Executives at companies that use a lot of commodities see things differently. Commodity prices are up, they say, and yes, ,, factories are producing so many goods that they are straining capacity. But elsewhere in the economy, there are pockets of softness and overcapacity keeping inflation in check at the consumer level.
"I think we've got enough retail capacity to serve 500 million [U.S.] people," said Timothy F. Finley, chief executive of Jos. Bank. "At least at our end of the business, you are not going to be able to push price increases through."
On commodities exchanges, cotton was selling for 63.45 cents a pound a year ago, compared to about 80 cents today. Bank's base 100 percent cotton pinpoint shirt was $29.95 then and now.
Commodities matter much less than the fact that Lands End has a $29.50 pinpoint shirt of its own, Mr. Finley said.
Shirts are similar
"The two of us have had the same price and that very similar, if HTC not same, shirt for the last four years," he said. "There are technical differences, but few."
Ned Rosenberg, senior vice president of Crown Central Petroleum, says things aren't much different in his business.
"The consumer is so sale-conscious and business conscious that the businesses really have to play to that," he said. "Everyone is overly afraid of inflation, and there is a danger we are going to err to overstop it."
Crown watched the price of crude oil jump nearly 50 percent early this year, after a late 1993 decline. One press report June 16 found crude oil commodity markets at a 12-month high as "traders faced the prospect that world supply won't meet demand by the end of the year."
It hasn't worked out that way, thanks in large part to a slow economic recovery in Europe and Japan. Gasoline and heating oil prices were nearly stagnant even as crude oil prices zoomed, and stayed well below 1993 wholesale prices. Crude oil prices have actually slipped since July after rising from about $14 a barrel to about $21 a barrel.
The recent rise in gas prices came after crude oil prices retreated (futures prices for early 1995 delivery are even lower), Mr. Rosenberg said. He said this fall's boost at the pump is due to more expensive refining required by new federal regulations.
Wholesale gas price
Factoring out the impact of the regulations, Crown gets 47 cents a gallon for wholesale gas, compared to 46 cents when the Fed began its wave of interest rate increases in February, Mr. Rosenberg said. Prices neared 65 cents a gallon last year.
"Obviously, you can see Crown's results, which haven't been so hot," he said. The company has lost $26.6 million in the third quarter, the company's worst quarter in a decade, compared to a $3.3 million loss in the same months of 1993.
Patrick Jackman, an economist for the U.S. Bureau of Labor Statistics, said the 13.1 percent jump in nonfood and energy materials prices reported over the year ending in October in the Producer Price Index is watered down several ways before it translates into consumer inflation.
First, energy costs have fallen more than 10 percent, thanks to big drops in November and December of 1993. Crude food materials, which jumped sharply late last year, have fallen 14 percent in the first 10 months of 1994.
Finished food and energy products account for nearly a quarter of the consumer price index, he said.
John Fenton, an economist for the Commodity Futures Trading Commission in Washington, said the linkage between commodities and inflation appears much weaker than when rising oil prices catalyzed historic U.S. inflation levels in the 1970s.
The country uses much less oil to create the same amount of wealth because of more efficient machines, he said, and because the economy's emphasis has shifted toward services from manufacturing. Inflation is also low because there has been little or no pressure to move wages higher.
Inflation was expected
"All the electronic parts of the economy use very little commodities," he said. "I think [the 1970s inflation cycle] was related at least somewhat to expectations. People expected inflation, commodities were up, so they used it as a reason for more inflation."
Cynthia Latta, an economist at DRI/McGraw-Hill in Lexington, Mass., said commodities price jumps today have the biggest impact on manufacturers. But manufacturers are in the best position to offset the jump by squeezing other costs, she said.
Manufacturing productivity rose at an annual 4.7 percent rate in the third quarter, she said, nearly 50 percent faster than in the economy as a whole. The rise was also 40 percent faster than productivity gains manufacturers posted between 1986 and 1992, she said. That covers a lot of sins.
"Because of the productivity gains, they haven't had to pass a lot of it along," Ms. Latta said. "The simplest explanation is that labor costs are 70 percent of all costs in the economy, and commodities are not all of the rest."