Inflation shows its face - so far with a sleepy smile
Prices rise, but pace is modest enough for the Federal Reserve to keep cutting interest rates.
| NEW YORK
That great villain of the economy - inflation - is yawning and stretching as if just waking up from a long sleep.
It's showing up in the price of gas at the pump, higher housing prices, and even some more-expensive chops in the butcher shop. But, so far, it's nothing more than a yawn, and certainly not enough yet to make the Federal Reserve reconsider its policy of lowering interest rates.
Yesterday, in one of the first signs that inflation may be stirring, the Labor Department reported that the consumer price index (CPI) rose by 0.3 percent in April, up from 0.1 percent in March.
"This is a pretty tame number, but we should begin to pay attention to inflation," says Sung Won Sohn, chief economist for Wells Fargo Banks in Minneapolis.
For the moment, the main culprits for higher prices are energy and food. In April, energy prices rose 1.8 percent. In the next several months, energy prices may continue to head higher. On Monday, for example, the California Utilities Commission approved a $5 billion rate increase that may result in a 50 percent increase for some users. This rate hike will be reflected in later inflation reports.
For most Americans, the big energy increase is at the gas pump. In April, regular unleaded shot up 5 percent, with average prices nationwide at about $1.76 a gallon.
It certainly has caught the attention of Fran Pataffi of Nutley, N.J.
"I just came back from a vacation, and it seems the price has gone up 20 cents a gallon at my station," she says. "Now, I'm going to start to look around to see what's the cheapest."
Because of rising gasoline prices, the travel industry expects consumers to modify their vacations this summer. Instead of taking long trips in the car, they may stay closer to home.
"Places where people would normally pass through have become destinations. It takes a lot more drastic rise to make people cancel their vacations," says Cathy Keefe, a spokeswoman for the Travel Industry Association of America.
Rising energy costs also have an indirect effect on what things cost. For example, it now costs more to ship products by truck, air, or even rail.
Mark Roeder, a legal assistant in Manhattan, is about to experience this first-hand. He's planning to move himself in a Ryder rental truck across country to Sacramento, Calif. He's not looking forward to tanking it up. "This is going to hurt," he says.
Once he gets to Sacramento, he'll find housing prices are rising sharply. Over the past year, the city led the nation with a 23 percent increase in home prices, according to the National Association of Realtors.
The Sacramento increase is part of a national trend - housing prices rose 6.5 percent in the 12 months ended in March.
"There is still a shortage of inventory in some markets," says Walter Molony, a spokesman for the realtors association.
Other cities with hot housing prices include Memphis, Albany, San Francisco, and Denver. Despite the soft economy, realtors are seeing surprising demand from new immigrants.
Some food prices are also on the rise, especially fruits and vegetables as a result of bad winter weather. So far, this has mainly shown up in the wholesale prices, that is the costs to food companies. Food is up about 5.5 percent over last year for wholesalers. But, for consumers, it's only up about 2 percent - indicating companies are absorbing some of the added expense.
One area where consumers will notice higher prices is in the meat section of the grocery store. "We had a harsh winter that did impact supply," says Alisa Harrison, a spokeswoman for the National Cattlemen's Beef Association in Washington. But ranchers are rebuilding their herds, and she expects prices to level off by Memorial Day, butchers' biggest day of the year.
Consumers may have found some bargains in other areas. Prices fell for apparel - as retailers tried to entice consumers into their stores - and for hotel rooms, airline tickets, computers, and phone service. Even the price of natural gas, which rose all last winter, fell in April.
At the moment, the Federal Reserve has not identified inflation as a problem. On Tuesday, when it reduced interest rates, the Fed said, "With pressures on labor and product markets easing, inflation is expected to remain contained."
In fact, some economists don't see sleepless inflation as a worry for Fed chairman Alan Greenspan. "If anything, it is good news for the Fed. It means they can cut rates more," says David Wyss, chief economist at Standard & Poor's.
Bruce Steinberg of Merrill Lynch predicts inflation will actually fall in the months ahead: "Inflation almost always falls in the early stages of a recovery."
But Mr. Sohn says the Fed can't afford to be complacent. He notes that the bond market - closely attuned to inflation - is acting as if inflation is a potential problem.
(c) Copyright 2001. The Christian Science Monitor