Will Commodity Prices Trigger Higher US Inflation?

CNBC's Rick Santelli had a very interesting debate with another regular commentator on the networks Squawkbox program one morning last week.


Santelli holds that commodity prices are soaring because producers are selling larger quantities of gasoline, upscale food, etc., to formerly third-world countries which are now growing significantly wealthier. Thus, their consumption is adding pressure to demand for grains, beef, oil, and other basic commodities.


The other fellow on the program that morning, whose name I forget, alleged, mostly, that because US product costs are predominantly labor, which is not getting more expensive, we won't see inflation.


Who is right? It's an important question.

Personally, I believe Santelli.

First, my own experience working with company-level cost data for over two decades leaves me believing that labor costs have become much smaller components of total costs in the average US firm. Due to investments in capital, in the form of tools, information, technology, etc., the productivity of the average US worker has remained high, relative to the rest of the world. Employment levels and, thus, costs, haven't grown at the same rates as they may have in prior decades.

In fact, one commentator opined that there isn't currently a lost-jobs-based recession yet because after the economic troubles of 2001-02, businesses didn't go on a hiring binge. By carefully retaining productivity levels and using fewer new workers, they aren't having to lay the workers off so quickly now.

Further, it's very believable to me that the world's commodity producers, operating, as they typically do, in an environment of either boom or bust, try not to produce too much excess supply. Thus, the rather sudden, relatively unexpected, in the West, rise of demand for energy and pricier food inputs in Asia have caught those commodity producers flat-footed. As demand outstrips supply, for a while, prices have nowhere to go but up, to clear the markets.

As an anecdotal example, I bought some pasta-based processed food products for my children recently. As recently as last fall, the item cost $1/box at retail. This past week, it was $1.5/box.

Sure, only 50 cents more. But a 50% rise in consumer-level price. Milk, baked and processed products using wheat or corn are the same.

If Santelli's debate opponent were correct, I doubt I'd be seeing these price increases. Instead, Santelli's logic already seems to be finding its way onto the prices of items on US grocery store shelves.