Inflation fears intensify

April 30, 2000|By William Patalon III | William Patalon III,SUN STAFF

Consumers who recently bought a tube of toothpaste, a bucket of house paint, or even a bag of M&Ms aren't suffering from sticker shock: Prices for those products just haven't jumped.

But for Millennium Inorganic Chemicals, which makes the whiteners for toothpaste, paint, sunscreen and even the white letters on M&M candies, it's a different reality. A big spike in electricity prices -- about 15 percent of its production costs -- has shaved the Hunt Valley-based company's profit margins. And yet, Millennium doesn't dare raise prices, fearing it would lose customers, so it either swallows the increase or squeezes out savings elsewhere.

Airlines have shown no such reluctance. The same run-up in oil prices that has boosted the cost of electricity has also sent the price of jet fuel soaring. Airlines are passing the higher costs along to passengers by slapping fuel surcharges of up to $20 on tickets.

Whether it's the ingredients of paint or toothpaste, jet fuel for air travel, or the hotel room for your next vacation, economists and other experts generally agree that prices are on the rise in portions of the U.S. economy. That was buttressed by the latest government inflation report, which showed consumer prices spiking in March. If prices continue rising at the rate they did in the first quarter, prices would increase 5.8 percent for the year.

That report on the Consumer Price Index sent stocks into a nosedive this month, with the Dow Jones industrial average and Nasdaq composite index notching their biggest-ever, single-day point drops.

But what's unknown is if the surge is an aberration caused by high oil prices -- which are falling -- or the first sign of inflation spawned by a sizzling economy that's finally boiling over.

"It's not much of a problem," said Leonard G. Fischer, who, as the director of purchasing for McCormick & Co. Inc., has a pretty good view of how the prices for products and services are behaving. "If we see inflation move from 2.5 percent to 3.5 percent, that's nearly a 50 percent jump. But, before getting all excited, remember [not too many] years ago when it was 10 or 11 percent. We're not headed there."

Maybe not, but that probably won't matter to the Federal Reserve, headed by inflation hawk Alan Greenspan. Fed policy-makers have raised interest rates five times since June and are widely expected to do so again at their meeting next month.

Entrenched inflation can be a huge problem for a country's economy. Paychecks don't stretch as far, and wage increases rarely keep pace. It erodes savings. It puts companies at a pricing disadvantage vs. competitors overseas.

And the threat of inflation heightens the danger that if the Fed is too aggressive in raising rates, it could tip the U.S. economy into a recession.

With all these causes for concern, it's little wonder that the CPI report spooked investors.

The CPI, a closely watched inflation gauge sometimes referred to as the "cost-of-living index," is a monthly survey the Bureau of Labor Statistics uses to measure the changes in prices for a basket of goods. Components include housing, food, electricity and transportation.

The most recent report said prices rose an alarming 0.7 of a percent last month. That exceeded the projected 0.5 percent and brought the year-over-year inflation rate to 3.7 percent -- the highest since 1991, the last time oil prices soared. Even the CPI's "core" rate -- which excludes volatile food and energy prices -- rose 0.4 percent, the biggest jump since January 1995.

Significant jumps were shown in such areas as public transportation, medical services and such kitchen-table staples as meat, poultry, fish and eggs. But the biggest villain in the CPI report was the price of energy, up 4.9 percent from February to March.

In fact, the spike in energy prices accounted for more than half the overall increase in the index, the second straight month that occurred, the Bureau of Labor Statistics said.

Crude oil and other petroleum-related products were major offenders: Gasoline prices rose 11.6 percent from February to March and were up a staggering 52.6 percent from March 1999.

High energy prices punish manufacturers such as Millennium, said Jeffrey D. Parker, director of global purchasing. The company has factories at Hawkins Point in Baltimore, as well as in France, the United Kingdom, Brazil and Australia.

"We're absorbing the cost," Parker said. "We can't pass it along."

This widespread reluctance has helped keep consumer prices reasonably steady even though it creates a quandary for Corporate America: If costs go up, but companies can't raise prices, corporate profits will fall -- unless other savings are found.

Productivity gains from streamlined production and the Internet have more than offset cost increases in recent years. But if prices keep rising, or no more productivity gains can be found, companies will either have to raise prices or stomach a drop in profits -- with neither option good for the economy.

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