Skip to: Content
Skip to: Site Navigation
Skip to: Search


To other economic warnings, add inflation

If prices keep rising, it could sour consumers and make the recession fight more difficult.

By Ron SchererStaff writer of The Christian Science Monitor / December 17, 2007



New York

From toys and airline tickets to food, gasoline, and jewelry, inflation is squeezing the American economy at a time when it's already struggling.

Skip to next paragraph

The main culprit is higher energy prices, since oil prices have remained above $90 a barrel for an extended period. But unlike past oil run-ups, business appears to be starting to pass on its cost increases to consumers. If that trend continues, it would have a wide impact, ranging from Federal Reserve policy to souring consumer sentiment.

"If we keep seeing inflation pressures similar to what we saw in November, there would be real problems out there," says Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Consumer prices surged 0.8 percent last month, the highest rate of increase since November of 2005 in the wake of hurricane Katrina, the government reported Friday.

It's not surprising that consumers are feeling the heat: in November, producer prices rose 3.2 percent, the fastest rate since 1973, mainly because of energy price hikes. Even the core rate of inflation, the rate without food and energy, rose by 0.3 percent.

Former Fed Chairman Alan Greenspan says he's beginning to worry about the inflation numbers. "We are beginning to get not stagflation, but the early symptoms of it," he told ABC's "This Week" on Sunday. Staglation was a symptom of the US economy in the 1970s, when inflation rose despite low or no growth.

A significant part of the inflation rise was from an increase in apparel prices, up 0.8 percent from the prior month. Analysts struggled to explain the shift, some pointing to seasonal changes, others to the rising dollar.

"I don't know whether we're seeing business suddenly develop pricing power or they are just saying, 'I don't have a choice with all the other costs going up, I have to raise my prices,' " says Mr. Naroff.

He says the weak dollar may be giving business the cover to raise prices for items that are made in the US. Or they may be just passing on their higher costs of imports. "This is a warning sign," he says. "There is no question about that."

Consumers are keenly aware of the rising prices. In a survey of investors in November, the UBS/Gallup poll found that 74 percent say inflation is hurting the economy, up from 64 percent a year earlier. Over a third said inflation was "hurting a lot," the highest reading since the poll started asking this question three years ago.

"What is happening is that consumers are upset about prices," says Dennis Jacobe, chief economist for Gallup in Washington. Economists thought the surge in energy and food costs was contained, he says. But now, he wonders if the data indicates that business feels it has to adjust its pricing.

That's the case, for example, at Studio 24E, a boutique in Oakland, Md. Within the last two months, Greg Elliott, the owner, has had to start to raise prices by about 5 to 10 percent. "We tried to eat our increased costs, because what we do is customer service," says Mr. Elliott. "But now, even for jewelry that's getting repaired, that's very hard to do."

Permissions