Buyers feeling pinch of inflation

By Marc Levy
Associated Press

HARRISBURG, Pa. — After a decade of relatively tame prices, consumers are starting to feel the "ouch" of inflation as the cost of everything from coffee, candy and home appliances is marching higher.

It's not a sharp pain yet, and some call it hardly noticeable. But with companies such as Procter & Gamble Co., Hershey Foods Corp. and Whirlpool Corp. passing along the higher prices they pay for raw materials to customers, it's beginning to get attention from people who shop in grocery, appliance and department stores.

It's also getting noticed by Federal Reserve officials, and that could mean higher costs for everything from car loans to home mortgages.

Minutes of the Fed's Dec. 14 meeting released yesterday suggest that central bankers' worries about rising prices could prompt them to continue bumping up short-term interest rates — which they raised five times in 2004 — to keep inflation in check.

For the most part, inflation as measured by the Labor Department's Consumer Price Index has lagged the rising cost of wholesale products like fuel, steel and plastics over the past year. In the 12 months ending in November, the CPI rose 3.5 percent while the change in the price of finished goods at the wholesale level increased 5 percent.

But the supply chain, which seems to have absorbed most of the higher costs, may be reaching its tipping point. Analysts say a slowly improving economy is giving producers more confidence to pass on higher prices, especially as excess inventories dwindle and commodities stay at elevated prices.

"I think the faster rate of inflation is here to stay," said Nigel Gault, of Global Insight in Lexington, Mass. "The important thing is whether it is stabilized at the rate it is at, or whether it will accelerate even faster. That is the question."

How consumers react to price increases will play a role in whether companies continue to raise them.

Shoppers in Harrisburg, Pa., said they noticed the price of fuel, health insurance and tomatoes going up, but if prices are rising more broadly, it's not yet a major concern.

"That's the tricky thing," said Jay LaRue. "They do it so gradually you don't notice."

If inflation begins to squeeze budgets, shoppers said they would do things like buy cheaper groceries and coffee, replace clothing or household items less frequently, and cut back on vacations, cable television and dining out.