Temps dropping, prices rising

January 6, 2010
By: Eric Lundin

If you're like me, you don't get too excited about day-to-day changes in atmospheric conditions, also known as the weather. Most of us have daily activities-going to work, attending classes, and so on-that are indoors anyway, so the weather usually doesn't have much effect on many people.

Usually and many are the key words. The current cold spell is pretty severe and has been with us for quite some time, and it's already had a small effect on all of us.

The most obvious effect is that our homes, offices, schools, and factories are using more energy to generate additional heat to stave off the cold, and the increase in demand has pushed up energy prices. The wholesale spot price for natural gas has been rising for months. It was less than $3 per million Btu in the middle of November; it's now more than $6 per million Btu.

In late December the price for residential heating oil was more than 46 cents per gallon higher than it was in December 2008. That might not sound like much, but it's a 20 percent increase.

Some agriculture prices are likely to rise. The cold spell has reached southern Florida and threatens orange, strawberry, and tomato crops. Cold spells in Florida tend to be short-lived and agriculture usually is unscathed, but the current chill is expected to last seven to 10 days. No damage is reported yet, but the potential is there.
The prices of soybeans and corn already are rising. Cattle and hogs don't buy more natural gas or residential heating oil when the temperature drops, but they do eat more to stay warm, and the expected increase in demand has been putting upward pressure on feed prices.

Food and energy prices affect all of us, so the next question is, How much? Will these increases put the brakes on the economic recovery?

Short answer: Doubtful. First, this isn't all that earth-shaking. Energy and food prices are always erratic. In fact, economists often ignore them when calculating inflation. Second, although U.S. consumers had to deal with steadily increasing prices throughout the last decade, some economists think that the overall price trend for the U.S. economy for the past 20 years has been deflationary.

In other words, the long-term trend is that prices overall have been falling, implying that the dollar goes farther than it did two decades ago. Consumers have more money in their pockets and therefore are in a better position to deal with price swings. Last, this blast of cold weather has affected the prices of just a few products. It isn't going to affect all crops, and it hasn't had much impact on other energy prices, such as gasoline, so it's not likely to ripple through the economy.

Not that we're immune from the weather. In fact, I had to hurry up and get this blog done a day earlier than usual because a certain snowstorm that has blanketed Iowa is moving toward northern Illinois, and I can't say for sure that I'll be able to get to work on Thursday.
Eric Lundin

Eric Lundin

FMA Communications Inc.
2135 Point Blvd
Elgin, IL 60123
Phone: 815-227-8262