Rising inflation becomes worrisome
By Kevin G. Hall
Knight Ridder News Service
SHADY SIDE, Md. — Soaring fuel costs, rising interest rates and creeping retail prices are hitting American pocketbooks in a combination unseen since the early '80s.
Inflation isn't surging anywhere near the 13.5 percent peak of 1980, but it's rising worrisomely as the economy suffers many strains, with a common root in global competition.
Oil prices grab the headlines, but prices for raw materials such as steel and even meat are rising, too. Growing global demand is to blame. China, India and Brazil — emerging economies expanding at a fast pace — are competing with U.S. business for raw materials, driving up their prices.
Oysterman Don Sheckells feels the inflationary pinch of high fuel prices, which are driving many Maryland watermen to other jobs. He's one of the few still in Shady Side, working the Chesapeake Bay as he has since 1972. Disease has ravaged the oysters and cut their harvests, and the jump in costs for marine fuel hit Sheckells hard.
"It used to be 80 or 90 cents a gallon" less than 10 years ago — adjusted for inflation, 85 cents in 1997 would be a bit over $1 today — "but now it's double that," said Sheckells, bracing for $2 or more per gallon at his next fill-up. "It's going to hurt."
When prices of goods and services rise, that's inflation.
Oil prices are now inflation's biggest driver: They reached $57 a barrel in March before tapering off to around $54 last week.
Higher oil prices raise operating costs and eat into the profits of fuel-dependent businesses such as airlines, cruise lines and package-delivery firms, not to mention anyone who drives. The costs of other raw materials are soaring too.
Last month, prices of core intermediate goods — semi-finished goods, such as the nylon used to make a tent —rose at an annual pace above 8 percent, the Labor Department reported. That's the fastest in 20 years. Prices on finished goods rose at a much slower pace: 2.8 percent, still the fastest since 1992.
To quell inflation, the Federal Reserve is raising interest rates. Higher rates then to reduce purchases of homes, cars and other big-ticket items. That eventually takes the steam out of inflation — and sometimes out of the economy.
If the Fed slows things too much, that can tip the economy into recession, as it has several times in the past 50 years. Sometimes that's the only way to stop inflation.
Miami-based Carnival Corp., the giant cruise-ship line, expects a 23 percent increase in fuel costs this year.
United Parcel Service operates more than 500 planes and 88,000 delivery vehicles. It tries to control costs by purchasing fuel in bulk. Last year those costs exceeded $1.4 billion. UPS imposed a fuel surcharge March 7.
Higher oil prices have hit manufacturing, too. PPG Industries of Pittsburgh makes brand-name retail paints such as Olympic, Lucite and Pittsburgh. On March 15, it announced price increases to defray "the rapid escalation of raw-material costs."
Petrochemicals are used to make paint. When oil prices go up, paint gets more expensive. PPG spokesman Jeff Worden said that in the first three months of this year, the company's costs for raw material rose by $50 million.
Higher steel prices are making Whirlpool washing machines and Caterpillar tractors more costly.
Higher global meat prices forced Bruce Rohde, the chairman of Con-Agra Foods Inc. in Omaha, Neb., to announce aggressive price increases for lunch meats. Con-Agra owns brands such as Armour hot dogs, Butterball turkeys and Hebrew National lunch meats.
To clamp a lid on this incipient inflation, the Fed has increased short-term interest rates seven times since last June. On March 22, it noted that "pressures on inflation have picked up in recent months."
A day later, the Labor Department reported that the consumer price index had shot up by an unexpectedly robust 0.4 percent in February.
The Fed is trying to ease off the gas instead of stepping on the brakes, but getting the balance right is tricky. If it raises interest too far, that could threaten the hot housing market.
Home prices have risen more than 40 percent over the past four years in many metropolitan areas. Many economists think they're going up largely on expectations of even higher prices rather than economic fundamentals, making home prices a speculative financial bubble.
Mortgage rates tend to rise with Fed rate increases. If they go high enough, purchases may dwindle and home prices could fall. That could lead to defaults on mortgages and bankruptcies.
The benchmark 30-year fixed-rate mortgage rose to 6.01 percent last week, compared with 5.40 percent in the same week of March 2004. Rates remain historically low, but some analysts think there's a psychological barrier at 7 percent, because the 30-year rate has been under that since March 2002 and under 8 percent since August 2000. Exceed those numbers and buyers may disappear.
The test is how far rates have to rise. Fed Chairman Alan Greenspan, who has balanced these risks since 1987, knows the danger. As economist Ed Yardeni noted last week: "The Fed chairman retires on Feb. 1, 2006. He certainly doesn't want to burst the housing bubble now and push the economy into a consumer-led recession."
