After surging for several months, jewelry price inflation at both the retail and wholesale levels moderated in May in the U.S. market, based on a market basket of jewelry price data from the U.S. government.

 

Here’s the summary of inflation at the jewelry retail and supplier level for the month of May, as expressed as a percentage change year-over-year (May 2008 versus May 2007):

 

• Jewelry Producer Price Index +7.2%
• Jewelry Consumer Price Index +8.0%

We believe two factors had a measurable impact on the moderation of jewelry price inflation in May:

 

• Prices had been set several months ago for Mother’s Day promotions which occurred in May, and those prices did not reflect the dramatic price inflation at the wholesale level that the industry experienced earlier this year. 

• Gold prices seem to have moderated somewhat, so suppliers have had some reprieve from continuously rising materials costs.

It is possible that we may have seen the largest price increases of the year during the first quarter, though there could be some anomalies in the percentage comparisons in subsequent months due to “tricks of math” – that is, easy or difficult comparisons to months last year when there was significant price volatility. For the moment, though, our sense is that the surging prices we saw earlier this year related to jewelry may moderate.

 

While we suggest that jewelry price inflation may “moderate,” the term is relative. We continue to predict that jewelry prices at both the wholesale and retail level will rise by about 7 percent for all of 2008. That’s an inflation pace we haven’t seen since 1990.

 

There is one wild card: precious metals prices are no longer determined solely by supply and demand. Speculators in the financial markets add substantially to price volatility. If they believe, for example, that gold should be bought as a hedge against the falling U.S. dollar, then gold prices will shoot straight upward again.

 

Jewelry Producer Price Index (JPPI) +7.2% in May

U.S. jewelry producer prices rose (JPPI) by a more moderate 7.2 percent in May 2008, according to the U.S. Bureau of Labor Statistics (BLS). This was the smallest increase since the beginning of the year.

 

In part, the moderation of jewelry producer prices may be related to less pressure from rising gold prices. However, while we are seeing some moderation in jewelry producer prices, the comparisons are all relative. For example, from 1991 through 2005, jewelry prices at the producer level never ran more than 2.0 percent annually, and the increases were often much smaller.

 

The following graph summarizes the monthly Jewelry Producer Price Index for inflation since the beginning of 2007. The percentage figures are based on year-to-year comparisons of the BLS Jewelry Producer Price Index.

 

Source: BLS

 

What’s behind rising prices at the wholesale and supplier level in the jewelry industry? It will come as no surprise that precious metals prices are the main force behind higher jewelry producer prices. The graph below compares the JPPI (red bars) to inflation for precious metals (gold bars); gold is the primary driver of precious metals inflation.

 

We note, however, that precious metals price inflation in May was only moderately greater than all jewelry producer prices. Producer prices for “all jewelry” were up by 7.2 percent in May, while precious metals costs at the producer level rose by 7.8 percent, only 60 basis points higher.

In prior months, precious metals price inflation has been 200 or more basis points greater than jewelry producer prices for all goods.

 

Source: BLS

 

Jewelry Consumer Price Index (JCPI) +8.0 percent in May 

U.S. jewelry consumer prices rose by 8.0 percent in May, as calculated by the BLS. This is the third consecutive month that jewelry prices at the retail level have risen sharply. Further, May’s gain in the JCPI of 8.0 percent was one of the largest gains in the past 15 years.

 

In February, we had predicted that the modest gains in the JCPI would end; we asserted that retail prices of jewelry were destined to rise sharply, due to the pent-up inflation pressure at the wholesale level. In part, that was an easy prediction since both Zale and Kay had announced that they planned to increase prices in the first half of 2008. Based on the market basket of jewelry prices that the BLS collects, it appears that most other jewelers also raised prices, a process that continues today.

 

It will not surprise us to see continuing high jewelry price inflation at the retail level for the next several months, though perhaps not at the pace of the past couple of months, simply because demand is soft.

 

The graph below summarizes the percentage change in retail prices of jewelry and watches by month on a year-to-year basis since 2007. The percentage change is based on a comparison to the same month a year ago.

Source: BLS

Outlook: Above-Average Price Inflation Expected to Continue

Our forecast calls for both jewelry consumer prices and jewelry producer prices to rise by about 7 percent in 2008. We’re going to stay with those forecasts, even though they are a bit tentative, given the surge in both the JCPI and the JPPI over the past couple of months. For sure, prices are headed higher as suppliers and retailers attempt to recoup large costs increases which have hit the industry over the past three years or so.

 

Source: BLS