Inflation gets nudge from oil, group says

Costlier energy affects many goods consumers must buy

May 25, 2004|By Bill Atkinson | Bill Atkinson,SUN STAFF

There is a growing consensus among economists that the pace of inflation is accelerating beyond expectations because of rising prices for energy, lumber, steel and other commodities.

Yesterday, the National Association for Business Economics said it now expects the Consumer Price Index - the government's inflation measuring stick - to rise by 2.3 percent this year and by the same percentage next year, well above earlier projections.

"I did not expect that inflation would come back this quickly," said Carl Tannenbaum, chief economist at LaSalle/ABN AMRO Bank in Chicago and an NABE board member. "What we are beginning to see is the high price of energy working its way into a lot of other products. There is pressure on the prices of a lot of things and these prices are being passed along to consumers."

Before the revision, NABE, an association of business professionals, expected the CPI to rise just 1.6 percent this year and 1.9 percent in 2005. While inflationary pressures have crept in, the association does not see them as a threat to the economy, which has been growing briskly.

The group said it doesn't expect the Federal Reserve Board to be forced to fight inflation by quickly raising the federal funds rate, which is at a 46-year low.

"Next year, our inflation rate [won't] get worse," predicted Duncan Meldrum, NABE's president and chief economist at Lehigh Valley, Pa.-based Air Products & Chemicals Inc. "What we are saying is we are getting back up to that long-term average [2.4 percent]. There is certainly a chance that if energy prices continue to escalate this [inflation] could be a problem."

Other experts agree that the economy is strong enough to handle a little inflation. Inflation at modest levels, they say, is not bad because it is evidence that demand for companies' products and services is strengthening, prices can be raised and more workers hired.

"We think that inflation is probably going to rise a little bit beyond where we are in a couple of months. We don't see an enormous spike driving upward," said Patrick Fearon, an economist at A.G. Edwards & Sons Inc. in St. Louis. "Where we are at right now is actually pretty modest [inflation] from a historical standpoint. The economy can probably weather this level pretty well."

Fearon said that last year the worry was deflation. It is associated with weak economies and marked by widespread and persistent falling prices that slice into company profits. That forces businesses to fire workers who in turn curb spending. The result: Overall economic activity slows.

Experts say businesses are passing along rising costs to consumers. April marked the fifth consecutive month that consumers paid higher prices on a range of goods and services from food and medical care to hotel rooms and airfare.

Most notably, fuel prices have shot up, and some experts see gasoline prices rising beyond $3 a gallon this summer. If prices climb too high, consumers who have driven the economy might pull back, warned Steven Cochrane, senior economist at in West Chester, Pa.

"I think they will. I don't think they have yet," Cochrane said. "We haven't seen any pull back in gasoline consumption. Right now, they are swallowing" the increases.

Most experts believe that the economy is humming along, and they see it continuing to grow even though inflation has ticked up. "It has been doing great," said James Glassman, senior U.S. economist at J.P. Morgan Chase & Co. in New York.

Glassman doesn't believe that the economy is experiencing inflationary pressures, just "bottlenecks" in pricing that will sort themselves out in due course. He said inflation is unusual this close to the start of an economic recovery and with so many people out of work.

"We are not really looking at an inflation problem," Glassman said. "I take it [NABE's findings] with a grain of salt. This is the thinking that the trend is your friend."

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