To other economic warnings, add inflation

If you want to buy Hannah Montana bedsheets, backpacks, dolls, or handbags at Ty's Toy Box, they will cost about 25 percent more than they did a month ago. While part of the rise reflects a surge in demand for Disney's singing phenom, part of it stems from increasing cost pressures at Ty's, based in Erlanger, Ky. "Prices are up on our inbound shipping," says Ty Simpson, the CEO of the online retailer.

Mr. Simpson says he's actually losing money on some items because of increases in shipping costs. He says shippers have moved from charging by weight to charging by dimensional weight. So a large item like the Thomas the Tank Engine Track Rider, a toy train that children can ride, is now a money loser, despite a price tag of $249.99. The company has started charging more for the heavier items it ships.

In Elliott's case, it's not just increased shipping expenses. Gold is up about $200 a troy ounce so far this year. Stainless steel, popular with many consumers, has doubled in price. "We can only [absorb] so much of it; we've had to raise prices," he explains.

Almost anyone who shops for food can attest to higher prices somewhere on the shelves. For example, Mr. Jacobe says he enjoys munching shrimp. "Last year, a pound of shrimp cost me $8 to $9 but today, it's $14 to $15," he recounts. "I am just amazed how much food has gone up from seafood to milk to a loaf of bread."

The prospect of rising inflation in a slowing economy is not a welcome event for policymakers. The Federal Reserve is in the middle of lowering interest rates to try to keep the economy from slipping into a recession. At the same time, some members of the Federal Reserve's interest-rate-setting committee want to show that the bank is tough on rising prices.

"There is no fundamental reason for inflation to get in the Fed's way, but it will," says Lyle Gramley, a former Fed governor now at Stanford Policy Research in Washington. "There is a deep division in the Fed – the worst I have ever seen – among people who worry most about the credit problem and its effect on the economy and those who worry about inflation."

So far, Fed Chairman Ben Bernanke has set interest-rate policy by consensus. This is one reason for the Fed's very measured approach. Mr. Gramley believes he needs to ignore the inflation hawks, those worried about inflation flaring up. "He needs to borrow Alan Greenspan's shoes and put them on and read the riot act to these people," says Gramley, arguing for more interest-rate cuts.

Some economists are sanguine that the slowing economy will cool the inflation numbers. "We are expecting a much slower growth rate next year that will take a lot of pressure off the markets," says Ethan Harris, chief economist at Lehman Brothers in New York. "By the middle of next year, the inflation concerns will be gone."

The key to lower inflation will be stable or lower energy prices, he says. "If the US doesn't slow down, then that's a different picture.... But right now, we are predicting oil prices will be flat."

Page: 1 | 2