There has been extensive media coverage of the commodity price collapse that has occurred coincident with the turmoil in financial markets. The slowdown in the world economy has deflated the high-flying balloon of commodity prices. Reading about this is one thing. Seeing the results graphed, as in the accompanying charts, is another matter entirely. A picture can truly be worth a thousand words.

Restraining Effect on Material Costs
For the construction industry, the first effect to take note of is the restraining impact this will have on material costs. Almost all building products have a commodity base. Remember that the international price of oil hit an all-time high of $147 USD per barrel in mid-July of this year. Since then, world oil prices have dropped by half. The nearly 20% annualized increase in construction costs in the second quarter of this year will moderate significantly from the late fall 2008 through next summer, at the least.

Among the commodity price charts set out below, pulp and newsprint are two of the few that are still either holding their own or are on the upswing. This is primarily due to production cutbacks. Firms in both industries have gone out of business, shut plants or taken deliberate action to reduce output in a tough selling environment.

From a broader perspective, there are a couple of developments to take note of, however. In emerging nations, the level of literacy is increasing dramatically, raising the demand for printed material. Also, with respect to lumber markets, prices in that sector usually begin to rise in advance of housing starts in a market turnaround. In other words, lumber prices are an advance indicator with respect to residential construction activity.

The Price of Gold is still Resisting Downward Pressure
The price of gold is just about the only other commodity that is resisting pressure on the downside. Demand for gold has been spiking as a result of worries about the solvency of financial markets. Times of increased uncertainty, whether economic or political, are always good for gold speculators. That precious metal fills the role of security blanket for many individuals who are worried about the security of their bank deposits.

Investing in gold is also often a hedge with respect to strong inflationary price pressures. Ironically, the bursting of the price bubble for other commodities also means a reduction in expectations about future price advances.

Inflation Restraining Impact will be Greater in the U.S. than in Canada
Lower-priced commodities will help to restrain overall price inflation. This will have greater effect in the United States than in Canada. That is because of the recent decline in value of the Canadian dollar versus the U.S. dollar.

A lower-valued Canadian dollar mutes the drop in commodity prices. For example, a price drop from $150 USD to $100 USD is only from $150 CAD to say $110 CAD, depending on the extent of the loonie's decline. Almost all commodities are priced in U.S. dollars.