Fretting about inflation
Some economists worry that the Fed is too complacent
Drive out to the ballpark or watch the game at home on a new big-screen TV? Buy the kids a pet or a new computer? Fry up an omelet or roast a chicken? The cost-conscious would stay at home and crack a few eggs while the kids surf the Web. Prices for televisions, PC s, and eggs dropped significantly last year, while those for gasoline, game tickets, chickens, and veterinary services rose significantly.
Overall, the 200 categories of goods and services the Labor Department tracks each month rose 3.3 percent last year; that compares with a 1.9 percent rise in 2003. If food and fuel prices--which are volatile because of hurricanes in Florida and political unrest in oil-exporting nations, among other things--are excluded, prices rose 2.2 percent in 2004, versus 1.1 percent the year before. Either way, it's a big jump.
Containment. But not so big as to cause panic at the Federal Reserve Board, which last week nudged overnight interest rates up by a quarter point to 2.5 percent, while affirming its "measured" pace of raising rates. The Fed, in its statement, called inflation "well contained."
Friday's employment report seemed to back up the claim. Just 146,000 new jobs were created in January, below economists' expectations of 200,000 or so. Hourly wages, meanwhile, increased a modest 0.2 percent. That probably puts the Fed at ease about a tight labor market driving up wages and salaries.
Despite the mediocre job numbers, some economists still worry. "There are price pressures in the system that don't get into the indexes," says Roger Kubarych, senior economic adviser at HVB America, a subsidiary of German bank HVB Group. Take housing prices, which rose a whopping 13 percent last year on average. To many homeowners, that's a green light to spend liberally by turning their homes into cash machines. "That is a classic manifestation of a growing inflationary mentality," says Kubarych.
And then there's energy. The price of fuel oil was up nearly 40 percent last year; gasoline rose 26 percent. Though geopolitical events drove much of that, the Organization of Petroleum Exporting Countries has signaled a new price target of around $40 a barrel of oil, some $12 above its prior level. Sustained higher energy prices bleed into all manner of other goods, from plane fares to the prices of paint and polyester. "Higher oil prices are inherently inflationary," says Anthony Chan, senior economist at JPM organ Fleming Asset Management.
The prices of other commodities such as steel, copper, and aluminum are jumping, too. It's a trend expected to continue as trade liberalization and rising living standards in poorer nations drive global demand. Famous--and famously wealthy--investors Wilbur Ross, who cornered the U.S. steel market earlier this decade, and Jim Rogers, cofounder of the Quantum hedge fund with George Soros, are betting their portfolios on it.
Consumers are starting to feel the squeeze, too. Last week Whirlpool announced price increases across its product line of 5 percent to 10 percent to offset higher oil and materials costs. "The magnitude of today's cost environment requires us to pass on higher prices to our trade partners and consumers," said CEO Jeff Fettig in an analysts' call.
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