(IDEX Online News) - Inflation has hit the U.S. jewelry industry, at the retail level and the supplier level. The government’s jewelry industry inflation report for March was a repeat of the trends which characterized February: supplier price inflation remained at double-digit levels, and retail jewelry price inflation held at high single-digit levels.

 

The full analysis is available to IDEX Online Research subscribers and IDEX Online members here.

 

The current jewelry price inflation rate at the retail level is multiples above prior years’ trends, while the jewelry price inflation rate at the supplier level is far above historical averages.

 

What is behind this surging price inflation? The primary driver is higher precious metals and diamond costs. Over the past year, gold prices are up by more than 25%, while polished diamond prices are up by 12% or so. Currently, both gold and polished diamond prices are at record levels, and appear to be headed higher.

 

Multiple factors are driving precious metals prices higher, especially gold. In part, investors are still seeking a “safe harbor” for their currency, especially since the value of the U.S. dollar has been eroding over the past year. Further, a recovery in the global economy is pushing up demand for gold used in the production of goods. And, finally, financial speculators are causing some of the pain.

 

Polished diamond prices are rising due to mining capacity constraints in the face of sharply stronger demand from consumers in China and India, as well as a moderate recovery in demand from U.S. shoppers.

 

In March, watch prices also participated in the inflation flames which are whipping the jewelry industry. In prior periods, there has been virtually no watch price inflation.

 

The table below summarizes inflation in the U.S. jewelry industry for the month of March 2011.

 

Inflation Component March 2011 vs February 2011 March 2011 vs March 2010 Retail – All Jewelry & Watches +0.6% +7.1%  Retail Jewelry +0.5% +7.9%  Retail Watches +0.9% +1.6% Supplier – All Jewelry & Watches +3.0% +13.0%  Supplier – Precious Metal Jewelry +3.7% +14.6%  Supplier – Watches 0.0% +0.3%

 

One bit of good news: retail jewelry prices are rising much faster than in the past, so the gap between retail and supplier prices is closing. It is clear that jewelry retailers are no longer willing to absorb margin-robbing supplier price increases.

 

The graph below summarizes the historic disparity between retail jewelry price inflation and suppliers’ jewelry price inflation. Beginning in November 2010, retail prices (green bars) began to rise. By January 2011, retail price inflation was closing in on supplier price inflation – retail merchants were finally passing along higher costs to consumers. In February, supplier prices spiked, followed by another surge in March, as the graph illustrates.

 

Source: BLS

 

Outlook: Inflation Is Here, Unless the Price Bubble Bursts

Are prices headed higher because of real demand created by a recovering economy? Or, are merchants pushing prices higher in an effort to recover sales and profits lost during the recent recession? If it is the former, inflation is here to stay. If it is the latter, a price bubble is forming, and it will burst.

 

It is difficult to determine whether a price bubble is forming, or if the current inflationary trends are sustainable. In the U.S. market, Federal Reserve officials are watching inflation closely. On one hand, there is pressure to provide a boost for economic growth; but that will inevitably lead to rapid inflation. On the other hand, most of the Fed’s governors have opted to let the economy grow at a slower pace in hopes of keeping inflation low. The problem is this: 2011’s inflation numbers, both for the jewelry industry and other industries, indicate that inflation is real. In short, it appears that merchants in all sectors are trying to recoup margins – hopefully, not at the wrong time, just as the economy is getting on solid footing. 

 

The full analysis and statistics on jewelry industry inflation for March is available to IDEX Online Research subscribers and IDEX Online members here. Click here for more information on how to subscribe or become a member.