With interest yields declining, investors are running for inflation hedges – typically commodities, pushing up the price of oil and other commodities, including gold.

Only time will tell if Wall Street speculation that inflation is real and here to stay is correct. But we do know this: In the jewelry industry, inflation has been cooling since mid-2008, both at the consumer and producer levels.

Only retail prices of watches continue to inch upward at a faster rate; other jewelry commodity prices have cooled, and are up, minimally, year-over-year. At the producer level, prices barely crept up, and the precious-metals category posted a modest price decline.

With the sharp rise in gold prices recently, inflation could return to the jewelry industry in 2009. Previously, we had predicted that weak demand would hold prices down, but if investors continue their run on commodities, inflation is just around the corner for jewelers.

JEWELRY PRICE INFLATION, FEBRUARY 2009

Below is a summary of inflation at the jewelry retail and supplier level for the month of February necklaces 2009, expressed as a percentage change year-over-year for February 2009 versus February 2008 in the U.S. market:

* Jewelry Producer Price Index

+0.6 percent

* Precious Metals for Jewelry

-0.8 percent

* Jewelry & Watch Consumer Price

Index +3.7 percent

* Jewelry Consumer Price Index

+3.6 percent

* Watch Consumer Price Index

+4.4 percent

At the retail level, the reported inflation numbers will likely moderate later in the second quarter, after 2008′s second-quarter retail price increases are factored in.

Comparing the first few months of 2009 to the same period in 2008 reflects “old pricing” in 2008 versus “new, higher prices” in 2009. In subsequent months this year, retail prices will be compared to the higher prices implemented in the second quarter of 2008.

Since there have been no material retail price increases since mid-2008, inflation at the U.S. retail level should remain modest.

Even when demand recovers, we expect that merchants will be wary that retail price increases will scare off loyal customers.

PRODUCER PRICES BUMP UP SLIGHTLY

The U.S. Jewelry Producer Price Index (JPPI) rose by a slim 0.6 percent in February 2009, according to the U.S. Bureau of Labor Statistics (BLS).

For all of 2007, the JPPI rose 2 percent on average, and in 2008, it rose 6.3 percent frank gehry on average. But February was barely above January’s 0.3 percent gain, and was one of the smallest gains in the past two years. It is more or less in line with the annual inflation rate that jewelry producers experienced during the 2000-2002 recessionary period, and it primarily reflects lower precious metals prices.

However, February’s inflation rate is well below long-term JPPI increases of about 1.4 to 1.5 percent annually.

There are several factors that explain why jewelry producer prices haven’t budged upward this year:

* Retail jewelers have cut back on reordering merchandise, prompting suppliers to offer price-based incentives to move product into stores – incentives that are reflected in the modest inflation rate at the supplier level.

* There is still a large backlog of high-cost goods in the distribution pipeline that suppliers must pass on to their customers. But the good news is that suppliers’ costs have moderated, so they are no longer being forced to raise prices amid weakening consumer demand.

* We believe suppliers will avoid significant price increases in the near term, as retail jewelers won’t accept them in this recessionary environment.

* Because the wholesale community is so fragmented, no one supplier has pricing power. We’ve seen some panic pricing from desperate-for-cash suppliers eager to move goods – at a loss, if necessary. Any supplier who tries to raise prices in this environment will lose business.

* Prices for both precious metal jewelry and gemstone jewelry have moderated. Gold had been the primary driver of precious metals inflation in 2007 and most of 2008. In January 2009, gold prices pulled back modestly, but have risen, holding steady at about $900 per ounce in February and March month-to-date. We believe $900 gold has already been priced into manufactured jewelry, so it’s unlikely that producer prices will rise notably.

Precious metals jewelry prices at the supplier level showed deflation in both January and February. Prices were down 0.8 percent.

Producer price inflation in February totaled 0.6 percent, dramatically below the retail price inflation rate for the entire jewelry category of 3.7 percent. Early in 2008, producer prices in the precious metals category rose more than the corresponding retail prices. As a result, retailers raised their prices in the second quarter of 2008.

These trends illustrate the lag effect between rising producer prices and the resultant rising retail prices.

CONSUMER PRICES UP 3.7 PERCENT

The U.S. Jewelry Consumer Price Index (JCPI) increased 3.7 percent in February 2009, BLS statistics show. After rising sharply through the second quarter of last year, retail jewelry price increases have moderated since the late summer of 2008.

For the full year of 2008, retail price inflation for jewelry in the U.S. market ran at an annual rate of plus 6.9 percent. Now, however, it appears that jewelry price inflation is moderating, and it will likely remain lower than 2008 in coming months, especially as increases that jewelers implemented in the second quarter of 2008 are factored in for comparison.

However, we note that jewelry price inflation at the retail level is still running well ahead of its two-decade annual gain of 1.6 percent.

Early in 2008, the components of jewelry and watch price inflation at the retail level reflected a disparity in price increases. Jewelry retail prices were up consistently during the first half of 2008, but watch retail prices showed virtually no price inflation.

In recent months, watch price inflation has steadily increased, moderating in January, then picking up again in February. Several factors contributed to inflationary watch pricing trends, including these:

* Mechanical watch mechanisms from Switzerland were in short supply due to manufacturing capacity constraints.

* Demand for high-end watches and branded watches had been relatively strong, but demand for the former was generally weak over the 2008 holiday selling season, suggesting that the flames of inflation will no longer be fanned by demand and desire for expensive watches.

OUTLOOK: MODEST JEWELRY PRICE INFLATION IN 2009

After rising nearly 7 percent in 2008, we continue to forecast more modest jewelry price inflation during 2009. sterling christmas tree The price of commodities, including gold, silver and platinum, remains the wild card.

If investors continue to buy these hedges against inflation, it will put upward pressure on jewelry prices. Our current prediction calls for 2009 price inflation to be in the low single-digit level, a departure from our earlier forecast of modest deflation, but because it is so early in the forecast cycle, this is little more than an educated guess tempered by historical trends.