The commodity price boom is fizzling fast, a development that could ease inflation fears and lead to some relief for consumers at the pump, in grocery aisles and at the jewelers.
After skyrocketing earlier this year, prices for a wide variety of commodities, including oil, corn, wheat and gold, have fallen drastically in recent weeks, thanks to declining demand, a strengthening dollar and emerging signs of weakness in the global economy.
"The rush is definitely over," says Nathan Golz, futures researcher at broker A.G. Edwards.
The Reuters-CRB Continuous Commodity Index, gauging the prices of a range of commodities, is down 16% from its July 2 peak. Still, it's up 25% from a year ago.
The price of a barrel of crude for delivery in September closed at $118.58 on Wednesday, down 59 cents from Tuesday. That's off 18% from its high closing price hit last month but up nearly 24% this year.
"The decline in energy prices should prevent (economic) matters from getting worse, as opposed to restoring growth," says John Lonski, chief economist for Moody's Investors Service.
The decline Wednesday came after the government reported a larger-than-expected increase in oil supplies. It also said gasoline demand in the past four weeks was down 2.6% from a year earlier as consumers found ways to cut back.
The nationwide average price of a gallon of regular was $3.862 Wednesday, or 25 cents lower than the July 17 record. That's still more than a $1 higher than a year ago, says AAA.
Less demand also explains the price drops in other commodities, such as softwood lumber, which fell 4% in the 12 months ended in June. That's because housing starts have fallen by nearly half since their peak, says Gopal Ahluwalia at the National Association of Home Builders. Gypsum, also used in building, has fallen 13.8%. "It's the overall effect of lower demand," Ahluwalia says.
The U.S. economic slowdown has stopped the decline in the dollar, as well. Money flows to developed countries with the highest interest rates, and that pushes up the value of their currencies. A three-month Treasury bill now yields 1.64%, vs. 4.24% for a three-month German bill.
The slowing European economy means it's unlikely that the European Central Bank will raise interest rates when it considers them today. "I think the worst for the dollar is over for a while," says Paul Kasriel, economist for Northern Trust.
Commodities rush could be over - USATODAY.com