Inflation shows sharp increase
By Nicholas Riccardi
Los Angeles Times
Inflation rose last month at the fastest pace in four months, the government reported yesterday in the latest evidence that higher costs of oil, metals and other commodities are increasingly being passed along to consumers.
With oil prices up, it costs more to make a plastic soda bottle, leading retailers to charge 4 percent more for a Coke. As fast-growing China hungers for more copper, the cost of pipes and other materials going into U.S. homes is climbing. And the escalating expense of making dolls has led Mattel Inc. to hike the price of Barbie.
These were all factors behind yesterday's Labor Department report showing the consumer price index jumping 0.4 percent in February over the previous month, sharply higher than the 0.1 percent increase in January over December 2004.
The core rate, which excludes food and energy prices, grew 0.3 percent, up from 0.2 percent in each of the past four months. On an annualized basis, the overall rate gained 3 percent while the core rate grew 2.4 percent, the biggest jump since August 2002.
Energy led the increase, leaping 2 percent in the month and 10.4 percent for the past year. The other biggest price hikes came in sectors sensitive to record gasoline prices, such as transportation and air fares, or in the medical or educational areas, where prices have risen steadily for years.
The stronger-than-anticipated CPI rise comes on the heels of Tuesday's warning from the Federal Reserve about aggravated inflationary risks.
Analysts said the CPI increase is worrisome but not fatal to the economic recovery, partly because wages are not rising much.
Inflation at the consumer level has been largely contained because businesses have spent the past four years steadily absorbing spiraling commodity costs.
As the global economy swells, everything from oil to wool and lumber has been subject to a worldwide bidding war. Consumers have been shielded from this rise partly because increased competition has forced retailers to keep prices low.
But, executives and economists agree, the costs of making products ultimately leak into the marketplace.
For example, the increased cost of petroleum has upped the cost of making a bottle of Coke by between 4 percent and 5 percent, estimates Roger van Brugge, who follows the beverage industry for Sanford Bernstein in New York. Coca-Cola Co. has passed that cost along to customers, as has its main rival, PepsiCo Inc.
"It's the second year in a row" the giants have hiked prices, van Brugge said. "I don't think they can pull it off for too many years in a row."
But there are more cost increases lurking, economists say.
John Lonski, chief economist at Moody's Investor Service, points out that industrial metals prices have risen an average of 29 percent annually since 2001. Prices of goods made with those metals haven't seen a comparable jump.
Lonski pointed out that even though the Fed has raised its benchmark short-term interest rate to 2.75 percent, that level is virtually the same as the annual rate of inflation.
By keeping rates so low, Lonski said, "the Fed is making it easier for companies to increase product prices" to make up for higher commodity costs.
That should keep profit margins flush. The danger, said Lonski and other analysts, is that if prices keep climbing, workers may be able to extract bigger pay increases. That could kick inflation into overdrive, they fear.
