Home > Uncategorized > Deflation While Commodities Prices Rise?

Deflation While Commodities Prices Rise?

My Dad was a small businessman, entrepreneur and incredible salesman. He always told me that a thing is only worth what you can sell it for. Looking back, that was a pretty brilliant insight. Just because you purchase a thing for a certain price, or a price guide says it is worth X dollars, doesn't mean a thing. Likewise, just because something is of little to no value on its face doesn't mean you cannot sell it for a huge profit.

Similarly, the seeming contradiction between rising commodities prices and deflation is not as contradictory or mysterious as it may seem. The raw materials needed to manufacture a product may be increasing. However, that doesn't mean that in an economically distressed environment of high unemployment, relatively stagnant wages, and low demand you can receive a higher price for the finished product.

Mish Shedlock, in his Global Economic Trends Analysis Blog, explains it quite nicely:

 I keep getting told that there MUST be a pass through of rising commodity prices. I disagree. The cost to produce something is irrelevant as to the price it will fetch. The latter is purely a supply/demand issue.

You can read the full article from Mish entitled Zero Hour for a more in-depth perspective. 
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