Inflation may be looming
One of the most-watched indicators of inflation showed that prices are rising at annual rate of 2.4 percent, increasing worries that inflation, and possibly even stagflation, may be looming.
The Commerce Department reported this morning that the price indexes for its Personal Consumption Expenditure report rose by .2 percent in June, whether adding in volatile energy and food prices or not. Overall, prices were up 3.5 percent compared with last June. Core inflation, which excludes energy and food prices, rose 2.7 percent in the last 12 months.
While those numbers might not seem alarming, economists said they were worrying in light of other recent developments. Bond traders continue to be bearish about the long-term prospects of the economy and seem to be betting on a downturn. Last month, the Bureau of Labor Statistics reported that the economy added only 121,000 jobs in June, which is generally considered not enough to absorb the growth of the workforce.
This combination of potential economic stagnation and rising inflation will cause a dilemma for the Federal Reserve, which tries to put a damper on inflation while promoting growth by tinkering with interest rates. Ken Goldstein, an economist for the Conference Board, says it will be hard for anyone to tamp down inflation as rising energy and commodity costs percolate through the economy.
"They are trying to keep the lid on a boiling kettle," he says. "There is no question that costs are rising."
The first to feel the pinch, he says, will be companies and investors, who've been enjoying record profit margins.
"Companies were raking it in. But those days are over," Goldstein says. Workers, whose wages haven't been keeping pace with inflation, appear to have started to moderate their spending, which could contribute to a slowdown.
"The 'flation' is here," Goldstein says. "But I'm not sure about the 'stag' part yet."