Appreciating Our Current State Of Low Commodity Prices

Dec. 31, 2019 8:13 AM ETGLD, IAU, PHYS, UGLDF, SGOL, UGL, BAR, DGP, GLDI, GLDM, OUNZ, GLL, AAAU, DGLD, DZZ, DGL, DGZ, GLDW, UBG, QGLDX, IAUF, PHYS:CA18 Comments
Jason Tillberg profile picture
Jason Tillberg
1.5K Followers

Summary

  • An unsung positive aspect of the US economy has been the low cost of commodities.
  • Low commodity prices have played a major role in keeping a lid on inflation and boosting real incomes.
  • Investors need to appreciate what happens if this trend reverses.
  • Higher commodity prices mean higher input costs, and that means both higher inflation and lower profit margins.

When I was younger, I had the thought that "a standard of living" was simply a reflection of how much commodities a person consumed. Simply put, a person with a high standard of living consumed a lot of resources to sustain that living standard.

With that same idea in mind, I've been observing the ratio of the producer price index of commodities vs. average hourly earnings as a good measure for the cost of a good standard of living.

This is a really good measure of the state of the working-class American, both lower and middle classes too. I'll explain this concept in good detail.

Here is chart of the producer price index for all commodities. This includes commodities like food, oil, and copper; our basic energy sources and building materials that we consumer each and every day.

Now, here is a chart showing the average hourly earnings of non-supervisory production workers in the US:

In November 2019, it was up to $23.83 per hour.

I wanted to get an idea of how many hours of work were required to buy the basket of commodities using the average wage at the time to the cost of the basket of commodities.

Where we are at today in the U.S. is that it's never required as little number of hours of work to purchase the basket of commodities.

It takes 8.351 hours as of November 2019, the lowest amount of time ever.

Consumer Confidence

Consumer confidence has been at some of the highest levels we've ever seen as well. You have to go back to the late 1990s during the dot-com bubble for higher levels of confidence.

The huge jump in confidence after the last Presidential election has been sustained, I would argue, on account of lower commodity prices maintaining higher living standards for

This article was written by

Jason Tillberg profile picture
1.5K Followers
Maker of hardwood roll top bread boxes, self taught in economics with focus on productivity and inflation.44 years old, married, have two daughters 9 and 11, and a 3 year old son. I live upstate New York near Ithaca.My profile pic is that of Joseph, from the story from the old testament, where he is telling the Pharaoh that he will have 7 years of famine and 7 years of plenty and in order to prepare, he would need to save 20% of his surplus during the years of plenty so that he would have not only grain for his nation, but grain to sell to the other nations.It tells the principle that we need to learn to live within the cycles of nature.Investing and allocating money requires that same understanding.With that said, I focus on what I believe the rate of inflation will be and how it relates to investments. I trust that understanding inflation will make for better informed investment decisions.I've been involved in stocks and investing since I was 13. Have had successes and mistakes, that I've hopefully learned from. I'm a fan of the following people to help give a perspective of my biases I may hold with regards to investment and economics: Adam Smith, Milton Friedman, Charles Schwab (Steel Tycoon), Peter Bernstein (Author), Henry Ford, Jay Gould, Ben Franklin, Aristotle, to name a few..

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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