Inflation is eating US wage gains
Food, housing, and healthcare costs rose at a 6 percent yearly rate in the past three months.
from the March 19, 2007 edition
Page 3 of 3
"The Fed will be on hold for the balance of this year," predicts Carl Tannenbaum, chief economist at LaSalle Bank in Chicago. He says surveys of wholesale and retail prices "are suggesting that inflation is not entirely under control."
In fact, the Labor Department's consumer price index on Friday showed price momentum in a wide range of goods. Food, clothing, shelter, medical care, energy, and airline tickets all posted sizable gains in February.
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Some of the recent price changes may represent one-time shocks. Beef prices are reacting, in part, to a devastating storm that buried cattle country in snow. The higher costs for fresh vegetables and fruits such as oranges can be attributed in part to bad weather. Oil and gasoline prices have gone up and down based on forecasts for demand, production quotas set by OPEC nations, and glitches at refineries.
But if the Fed doesn't need to worry about any one price, it does have the task of watching the overall price level. A loose monetary policy can allow a broader cycle of price hikes in the economy, damaging consumer and investor confidence. Such a spiral, once started, can be hard to stop.
The Fed wants "to maintain a healthy investment environment where investors are not seeing their ... returns eaten by rising prices," says Mr. Tannenbaum. That stability helps businesses create jobs and boost productivity, allowing workers' real income to rise.
Some economists say a cooling economy will help to tame inflation. Prices have been falling, in fact, for cars, computer equipment, and other categories that respond to cyclical swings by consumers.
Other analysts are skeptical that the economy is slowing down. Mr. Darda expects both output and inflation to show surprising strength.
"I think we're going to end the year with core inflation much closer to 3 than to 2.5" percent, compared with 12 months before, Darda says. The Fed may not act soon, but "the next move is probably a tightening."
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