Inflation is back. Certainly it's not the chain-saw wielding monster of the late 1970s and early '80s, which slashed Americans' earning power. But in parts of the economy, it's buzzing again.
That has economists looking again at inflation and its risks to stocks, and over time, consumers' pocketbooks.
As chief economist Ken Simonson wandered about the annual convention of the Associated General Contractors of America in Orlando, Fla., last week, contractors kept telling him horror stories about soaring prices: twice-as-costly steel reinforcing bars; bridge sections 25 percent higher; copper prices and PVC (piping) products up dramatically.
Overall, the consumer price index could rise 2.5 to 3 percent this year, speculates Dean Baker, an economist at the Center for Economic and Policy Research, a Washington, D.C., think tank. That's up from 1.6 percent in 2002 and 2.3 percent last year.
So, do economists see the start of a '70s-style price spiral? Surprisingly, no.
Despite two big inflation engines revving up again - rising commodity prices and the fall in the dollar against other major currencies - most economists don't see a big enough inflation threat for Fed Chairman Alan Greenspan to push for higher interest rates before the fall election.
Indeed, a few economists pooh-pooh the more-inflation hypothesis entirely.
"Deflation remains more of a threat than inflation," says Jack Lavery, a consulting economist in Spring Lake, N.J.
Here's how the economy's inflationary and deflationary factors stack up, according to the common view.
China and the United States are the two key engines of growth in the world. China's booming economy has led to a growing demand for commodities - steel, copper, oil, etc. This has forced up their prices. Scrap steel has quadrupled in price. Ships to carry the scrap and other resources are in short supply. So shipping charges have soared.
But the extra cost of commodities does not translate fully into US prices.
Fed governor Ben Bernanke estimates that a permanent 10 percent increase in raw materials prices leads to perhaps a 0.7 percent rise in the price of intermediate goods and to less than a 0.1 percent increase in consumer prices.
Another push on prices arises from the drop in the value of the dollar against a package of foreign currencies. That makes imports more expensive, and imports account nowadays for about 15 percent of purchases in the US.
Mr. Bernanke calculates that a 10 percent decline in the dollar - about what's happened in the past year - adds over time between 0.1 to 0.3 of a percentage point to the level of core consumer prices. That's a measure that excludes energy and food prices.
"With the dollar at its current level, we will have mild inflation over the next several years," predicts David Malpass, chief economist of Bear, Stearns & Co., a Wall Street investment firm.
Of course, a further drop in the dollar would increase inflation. So far, Wall Street doesn't seem worried.
"The key issue for the stock market is whether profit growth outweighs worries about inflation," he adds. "I think it will."
In the past, high inflation has correlated well with flimsy stock prices. But several factors are restraining inflation in the US. Among them: superb productivity gains, excess industrial capacity, high unemployment, falling labor costs, outsourcing abroad of jobs and service chunks of American companies, and plenty of ability abroad to supply the US with cheap goods. At the finished goods stage of production, US firms are running at a low 72 percent of capacity. So they find it difficult to raise prices.
All these factors should "roughly offset" the commodity and dollar effects on prices, reckons Michael Cosgrove, an economist at the University of Dallas.
But there are no guarantees. For example: by January, European car prices had risen about 11 percent from the same month in 2003 as the dollar fell 40 percent against the euro. The sticker price on Japanese cars was up 4.6 percent.
Economists do see risks ahead.
Japanese, Chinese, and other Asian central bankers have piled up $2 trillion in reserves as they strove to keep down the price of their currencies against the dollar. If some of them should decide it's time to get rid of some of those greenbacks, which are losing value, they could bring about a run on the currency. That would hike American inflation and perhaps prompt the Fed to raise interest rates to support the dollar.
"That's not likely, but it's not impossible," says Mr. Baker.
China, with its inexpensive goods, has been regarded as a great exporter of deflation to the US, keeping down prices at Wal-Mart and other stores. What if China decides to revalue its yuan by 5 percent later this year and another 5 percent soon thereafter, as is widely speculated?
That revaluation would boost prices.
Meanwhile, in those sectors of the US economy that have seen inflation roar, the situation is more dire. The steel contractors' association has sent letters to key officials in Washington, seeking relief from steel shortages. CEO Stephen Sandherr warns that "suppliers will no longer guarantee delivery at any price...."
That sounds like a recipe for steep inflation. But so far the overall problem is a pixie, not a monster.