Surging prices signal inflation

3rd straight CPI increase is raising some concern

Good news now, economists say

April 15, 2004|By Bill Atkinson and Paul Adams | Bill Atkinson and Paul Adams,SUN STAFF

After a long holiday, inflationary pressures are back.

Consumer prices - lifted by more expensive gasoline, airfares and clothing - rose by 0.5 percent in March, the Labor Department reported yesterday.

It was the third consecutive substantial increase, and many economists say it signals a probable acceleration of inflation in the future.

Higher prices for a broad spectrum of goods and services - including steel, cable television, candy bars and Walt Disney World - are good news for now, economists say.

They show businesses are gaining confidence in the strength of the current economic recovery. And experts say the pace of inflation isn't expected to become dangerous anytime soon.

But rising prices are likely to lead to higher interest rates that could slow the housing boom that has helped sustain the economy in recent years. And inflation spotlights other potential challenges such as the soaring federal budget deficit.

"The winds have changed," said Kenneth Mayland, an economist at ClearView Economics in Pepper Pike, Ohio. "By definition you are bound to see higher inflation."

Since the year began, consumer prices have risen at an annual rate of 5.1 percent, according to the Labor Department. Core inflation, which excludes volatile food and energy, was up by 0.4 percent in March, the largest monthly increase in two years.

Not surprisingly, the response on Wall Street to the Labor Department report was negative because many investors fear the Federal Reserve will soon raise interest rates to slow an economy that appears to be rapidly gaining strength.

For a second consecutive day, investors sold stocks despite strong corporate earnings reports, driving the Dow Jones industrial average down to 10,377.95. The index is down 137.61 points since Monday.

Experts see evidence of inflation creeping throughout the economy.

The average price of a gallon of milk is up 4.9 percent from a year ago, gasoline is up 7.6 percent and the cost of plywood for homes has more than doubled. Even a one-day ticket to Disney World has risen 5.3 percent.

"It is starting to show up," said Jay Bryson, global economist at Charlotte, N.C.-based Wachovia Corp. "At a minimum you can say the risk of deflation that everyone was wringing their hands over last year continues to recede further and further. It certainly seems that the momentum in consumer prices is higher."

Some sectors of the economy have experienced serious price spikes.

After hitting near-record lows several years ago, the price of lumber has gone from $282 per thousand board feet last year to $420 as of April 9, said Mark Hunt, a location manager for Dallas-based Builders FirstSource, which supplies materials to homebuilders in Baltimore, Delaware, New Jersey and Philadelphia. Such prices haven't been seen since 1999, when the cost of lumber hit an all-time high.

Plywood, a key ingredient in the home-building industry, has skyrocketed from $258 per thousand square feet a year ago to $597 today.

"It really boils down to supply and demand," Hunt said. "The mills are cranking it out, but the demand is more."

Getting wired for MTV and 24-hour sports channels has climbed about 5 percent to 8 percent over the past year. The cable industry blames its rising prices on higher programming costs and the expense of providing customers with broadband Internet, digital television and other technological upgrades.

"Customers don't always appreciate that cable companies have to pay for the programming," said Matthew M. Polka, president of the American Cable Association in Pittsburgh.

The cost of getting sick is rising steadily. Health care premiums have increased about 14 percent annually in recent years, said Jon Gable, a vice president and analyst with the Health Research and Education Trust in Washington.

"Deductibles in the last two years have grown dramatically," he said. For small employers, the average deductible has almost doubled since 2000.

The price of steel scrap, which is recycled to make cars, beams and appliances, has jumped 48 percent since the end of 2003. "I can tell you that the steel producers are feeling it on their cost line," said Tom Danjczek, president of the Steel Manufacturers Association in Washington. "Some of their customers are not very far behind, hence the consumer can't be terribly far behind. The [prices] either get passed on or you go out of business. Pick your poison."

China has been bidding up prices of copper, steel and oil to fuel its booming economy.

"World resources are tight whether it is steel or oil," said Peter Morici, a University of Maryland international business professor. "The Chinese economy is booming to some extent at the expense of our economy."

Bryson said China isn't the only country gobbling up resources. "What is going on is the fact that we are in the midst of a global economic upswing," he said. "Almost in every major economy of the world growth is picking up."

China and other countries can hardly be blamed for rising milk prices.

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