Just as consumers and businesses seemed to be growing accustomed to an incrementally more expensive life, the marketplace has abruptly, if temporarily, shifted course. After months of steeply rising prices, oil prices are down 20 percent in the last four weeks and a marketbasket of commodities, including corn and wheat, is down 15 percent.
The sharp reversal, which has seen pump prices slide back toward $4 a gallon when many drivers feared $5, is creating another deep gasp of confusion for consumers, who are second-guessing what happens next and which changes in prices and buying habits are likely to stick.
To Chris Hausman, a farmer in Pesotum, in east-central Illinois, recent steep drops in oil and grain prices are just the latest jolt. Prices for the corn and soybeans he grows spiked to records a few months ago over fear that Midwestern flooding would zap the 2008 crop. But now, under fair skies, the value of his crops has dropped sharply.
Hausman had to decide a few days ago whether to buy fertilizer at roughly triple what it cost him five years ago. Or he could wait and hope the decline in oil prices, a chief fertilizer component, would show up soon in the price of the product.
Hausman plunked down his money.
"I didn't want to take the risk that oil prices would turn around and fertilizer would jump even more," Hausman said.
Across the country, consumers and businesses are wondering about the same sorts of questions: Continue to expect $5 gas, or something more reasonable? Keep draconian plans in place to cut energy consumption, or ease up a little?
But don't rush out and buy a gas guzzler just yet.
Food price increase
Despite the steep drop in prices for oil, which has fallen from $145 a barrel in early July to just over $114 Monday, few economists expect oil to return quickly to the $60 range it traded at before the steep price increases started two years ago. And consumers, jolted by a nearly 7 percent jump in food prices during the first half of this year, aren't likely to see any immediate benefits from the recent drop in commodities prices.
Oil prices are down for several reasons, including the continued expectation that a slow U.S. economy, and slowing economies abroad, will affect global demand into next year. But other factors could cause oil prices to quickly reverse course and head higher again. Russia's military conflict with the nation of Georgia is raising international tensions that could boost oil prices, for example.
And recent declines in agricultural commodities could change abruptly, too, depending on the weather. Meat prices seem set for a climb. Farmers slaughtered an extraordinarily large number of animals this summer, due to sky-high feed costs, causing prices to slip. Prices this fall could rise because of smaller livestock herds.
Amid the uncertainty, don't expect any major price relief anywhere in the grocery store.
Packaged goods-makers, after suffering through several months of pinched profit margins, will do all they can to keep consumer prices high, even though their costs for wheat, corn and other raw materials are falling. Milk has dropped 15 percent from a year ago, and wheat has fallen $2 a bushel.
"Oil went bananas, and wheat and corn went so crazy, the food companies kind of got caught out on that," said Alexia Howard, senior analyst for Bernstein Research. "Now we've gotten to the point that they're going to be very conservative with any price cuts. They don't want to be caught being overoptimistic."
Howard anticipates a repeat of the cycle seen a decade ago. Food companies saw margins squeezed as commodities prices rose in 1995 and 1996, then raked in far larger profits in 1997, as their costs declined.
Procter & Gamble just three months ago figured its input costs would jump $2 billion during the fiscal year that began July 1. In a conference call last week, the maker of Tide soap, Crest toothpaste and many other products said it now expects costs to jump $3 billion.
Northfield-based Kraft expects its costs to rise by $2 billion for all of 2008. Irene Rosenfeld, Kraft's chief executive, said the entire industry is expecting big cost hikes, despite a table the company displayed to analysts last week showing declines in prices for wheat and other commodities.
"They're all coming to understand that this isn't going away any time soon," Rosenfeld said.
Kraft pushed through a 7 percent price increase earlier this year, causing its total revenues to rise even though sales volume fell by 1 percent.
Downers Grove-based Sara Lee got in the act last month, pushing through a 5 percent price increase in its packaged meats.
Changing behavior
Consumers have noticed. And some have begun to change their behavior.
Valerie Simich's daughter and two young granddaughters, on a shopping trip to Costco on the far Southwest Side, bought house-brand snacks instead of brand-name products. They had planned to buy a package of hamburger patties, which cost $12.99 a few months ago, but balked at the $16 price.
"I think the worst is yet to come," Simich said. "It's going to get worse, long before it gets better."
Dave Rogers, 41, a salesman from Evergreen Park, said he does not expect to get any relief from falling commodities.
"As commodity prices go down, the companies are going to keep prices up," he said. "They're going to milk whatever they can to recoup the losses they've had over the last year or two."
Indeed, companies will be reluctant to cut prices, say advertising and marketing experts. Yet they also have to find a way to market products to consumers whose pocketbooks are tightly battened down.
Steffan Postaer, chief creative officer of advertising agency Euro RSCG Chicago, said clients such as Valspar Paint, Anheuser-Busch and the mattress manufacturing industry have so far not seen any evidence the recent drop in prices for raw materials will have an "echo," in which consumers will demand price cuts too.
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