Inflation haunts grocery aisles

October 21, 2007|By JAY HANCOCK

The end of denial always requires a jarring encounter with reality. Mine came at the Giant, where a $4 gallon of milk made clear - in a way that somehow $3 gas hadn't - that forces pushing up consumer prices are aligned as they haven't been since the 1980s.

A worldwide boom has driven up the costs of basics such as energy, food and metals as well as shipping capacity and smart workers. The computer-productivity and global-outsourcing trends that enabled a decade of low inflation seem to be running out of steam. A weak dollar is pushing up import prices.

Inflation is back, even if the established powers don't want you to think so. Last week's consumer price report cooed with reassurances. Prices were up only 2.8 percent in September compared with those of September 2006, said the government. "Consumer prices increase modestly," said The Wall Street Journal headline.

Just don't look too closely.

After going up less than 3 percent in 2006, energy costs are increasing at a 12 percent annual rate this year, says the Bureau of Labor Statistics.

And that was just through September. Oil is up another 10 percent this month. Grocery prices have risen at a 7 percent annual rate, and milk and cheese prices are heading toward the 18 percent mark.

Food prices haven't risen this fast since the early 1990s. And if total prices keep cooking the way they have through September, this will be the worst year for inflation since 1991.

How's that for modest?

Sure, economists like to look at "core" inflation that doesn't include food and energy costs that supposedly obscure underlying trends. But only certain organisms on Stargate SG-1 can live without food and energy. Besides, prices for transportation, medicine, education and communication are going up faster than at any time since at least 2000. Last year, clothing prices rose for the first time in eight years.

Even the junk metal they use to make pennies costs more than a penny. Don't blame pensioners if they're less than thrilled with the 2.3 percent Social Security increase announced last week.

So what's keeping the official inflation rate so tame? "Recreation" costs rose by only three-tenths of a percent through September. So you'll need to get a cheaper cut of beef for Sunday, but don't worry: You can splurge at Putt-Putt.

But housing prices are the main factor. They rose by only a 1.6 percent annual rate over the summer and have gone up at a 2.9 percent rate so far for the year. There are huge problems with the way the government measures shelter costs; other research shows home prices are actually falling.

But the larger point is that, for the 70 percent of Americans who own their dwellings, stable or suddenly falling housing costs aren't doing any good. These people have bought their homes, many at very high prices. Those costs are sunk, and a report from the Bureau of Labor Statistics doesn't make any difference. Rising food and energy expense, on the other hand, hurts everybody every month.

I figured the inflationary surge that began in 2004 would blow itself out by now, a victim of weak U.S. growth and a global economy where there's always a cheaper outsourcing factory. But the surge seems to be accelerating. The world economy that once did America's bidding as a supplier is now competing with it as a buyer. Money created by central bankers for bidding up prices of everything from toilet paper to tractors shows few signs of diminishing.

Yes, there are a million stories about why the latest spike is temporary and the 4.8 percent yield on the long-term Treasury bond, which betokens low inflation for decades to come, is reasonable.

I've written some of them. Oil's rise to an all-time high of $90 a barrel is driven by speculators who will soon lose their shirts. Food and dairy inflation is caused by droughts or corn supplies momentarily depleted by demand from ethanol distillers. High costs will prompt the discovery of new raw-material supplies, which will cause prices to drop. The housing slump will slow the U.S. economy and ease inflation pressure.

None of them has come true.

Speaking of central bankers, even Alan Greenspan, chief undertaker at what everybody thought was inflation's funeral in the 1990s, sees it rising from the casket. The first sign, he says in his new book, will be an increase in the price of U.S.-imported Chinese goods. Sure enough, such prices "rose markedly in spring 2007 for the first time in years," he writes.

It's making my stomach churn. I need a glass of milk.

jay.hancock@baltsun.com

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