The Impact of Rising Commodity Costs on American Disposable Incomes

Going in to a third year of an economic slump, Americans seem to be cautious, yet optimistic, when it comes to their job security and the overall health of the economy. However, will concerns other than employment figures compromise the current slow growth in the economy?

Despite the US Department of Commerce's report that incomes in the United States are slowly rising, commodity costs are cutting in to the overall benefit of this small positive change.

It's been hard not to notice the change in oil prices over the last few months. With the price of crude oil bottoming out near the end of 2008, it has been rising since, with a current average price at the pump of over $4, and approaching a whopping $5 in some states. While this current price spike is likely due to the conflict in Libya (and the world's reaction to it), trends from the last 72 months suggest that crude will be on an overall uphill climb. Other potential factors impacting oil prices are as higher per capita oil consumption per person worldwide to the massive earthquake (and aftershocks) in Japan .

Other commodities have also increased in price dramatically over the last year, with current prices for wheat up nearly 60% since March 2009 and corn up nearly 90% since March 2009. Perhaps the most dramatic change in price for a commodity is gold, which is up nearly 28% since March 2009, but in dollars, equates to a $300+/ounce difference.

The good news is that the overall health of the US economy seems to be improving, with a .3% increase in income (from employment) in February. In addition, consumer spending has risen .7%, which would mean that confidence in the staying power of a recovered economy is on the upswing.

According to Federal Reserve Chairman Ben Bernake, between October 2010 and February of 2011, gains in personal income outpaced inflation. However, with unemployment still high, consumer confidence isn't as high as it could be.

Chairman Bernake also noted that a potential overall rise in commodity costs could very well endanger the slow growth of a very feeble economy: "sustained rises in the prices of oil or other commodities would represent a threat both to economic growth and to overall price stability".

Resources:

http://www.csmonitor.com/Business/2011/0328/US-incomes-rise-but-disposable-income-drops.-Blame-oil-prices

http://www.oilprices.com/history

http://money.cnn.com/data/commodities/

http://www.csmonitor.com/Business/2011/0318/Beyond-Libya-Four-factors-affecting-oil-prices