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11/21/2004

Inflation surge: Is it here to stay?

By Ron Scherer
The Christian Science Monitor

NEW YORK — Inflation is seeping back into the economic landscape.

Americans know all too well what it feels like if they drive, buy a mozzarella and tomato salad, or want to ship food treats to a son or daughter at college by UPS. Prices that had been stable for a long time now require shelling out more money.

A spurt in inflation has important ramifications for the economy as a whole. The Federal Reserve, which might have been thinking about holding interest rates steady next month, might raise them instead. Higher prices may make some Americans think twice about how much to spend over the holidays. And inflation is not good for the bond market, which could ultimately push up the cost of mortgages and corporate funding.

Wednesday, the government quantified some of this financial hardship, reporting that the October consumer price index rose 0.6 percent, its fastest rate since March.

The uptick in consumer prices followed a report on Tuesday that October wholesale prices leaped by 1.7 percent — the highest pace in almost 15 years.

Still, economists differ over the meaning of the news. Some believe it may signal continued inflation. They don’t think businesses can hit the productivity button any more and absorb the costs.

“This is the worst inflation since the late 1990s,” said Roger Kubarych, chief economic Adviser for HVB Americas. “And the Fed was tightening considerably then.”

Others point out, however, that the price of oil is dropping. In addition, they argue the U.S. economy is now so competitive hardly anyone buys at retail prices anymore.

“Yes, we’ve had a modest uptick in inflation, but the key here is that it’s not leading to an inflationary spiral,” said Jose Rasco, an economist at Merrill Lynch & Co. “Labor is still two-thirds of the cost of doing business and when was the last time your boss gave you a raise?”

Economists are divided over whether inflation is here to stay. Many argue that most of the price increases are related to the spike in energy costs and the bad weather that hit both coasts this fall.

“Energy is the only rising price,” said Tim McMahon, editor of inflationdata.com, a financial Web site. “The rest doesn’t look bad.”

Some even think the rising prices can be beneficial. Economist Robert Brusca of FAO-Economics said much of the inflation is getting tacked on to capital goods that are exported. Producers of oil industry machinery, construction equipment, metal-forming tools, electric transformers, light trucks, and mining equipment have all raised prices.

“I would argue that maybe it’s good,” he said. “They’re selling their products abroad at a better price.”

Yet U.S. imports are also more expensive, in large part because the U.S. dollar has fallen, particularly compared with the euro and the Canadian dollar. Last week, the government reported import prices from Europe were up 5.7 percent over a year ago and 6.1 percent for products made in Canada.

That’s been true this year for food prices, which have been relatively stable for some time. The 10-year average increase for food prices is 2.5 percent. But so far this year, they are up 3.3 percent over a year ago, said Corinne Alexander, an agriculture expert at Purdue University in West Lafayette, Ind.

Some of the highest prices are in dairy products. The price of butter, for instance, is up 27 percent over last year. But other food staples are also rising, in part because of hurricane damage in the South and the storms that hit California this fall.

“Fresh tomatoes and bell peppers have been hit pretty hard on both sides of the nation,” said Alexander.

Some of the worst-hit commodities are those traded internationally. China has been a major buyer of steel this year. That’s spilled over to places like Brampton, Ontario, where Metal Supermarkets has seen the prices it pays for steel rise by 25 percent to 35 percent.