Economists Believe Rising Cost of Inflation Is Due to Energy, Steel Prices
May 25, By Bill Atkinson, The Baltimore Sun Knight Ridder/Tribune Business News
There is a growing consensus among economists that the cost of inflation for businesses is accelerating beyond expectations because of rising prices for energy, lumber, steel and other commodities.
"I did not expect that inflation would come back this quickly,"
said Carl Tannenbaum, chief economist at LaSalle/ABN AMRO Bank in Chicago and an
NABE board member. "What we are beginning to see is the high price of
energy working its way into a lot of other products. There is pressure on the
prices of a lot of things and these prices are being passed along to
consumers."
Before the revision, NABE, an association of business professionals, expected
the CPI to rise just 1.6 percent this year and 1.9 percent in 2005.
While inflationary pressures have crept in, the association does not see them
as a threat to the economy, which has been growing briskly.
The group said it doesn't expect the Federal Reserve Board to be forced fight
inflation by quickly raising the federal funds rate, which is at a 46-year low.
"Next year, our inflation rate (won't) get worse," predicted Duncan
Meldrum, NABE's president and chief economist at Lehigh Valley, Pa.-based Air
Products & Chemicals Inc. "What we are saying is we are getting back up
to that long term average [2.4 percent]. There is certainly a chance that if
energy prices continue to escalate this [inflation] could be a problem."
Other experts agree that the economy is strong enough to handle a little
inflation. Inflation at modest levels, they say, is not bad because it is
evidence that demand for companies' products and services is strengthening,
prices can be raised and more workers hired.
"We think that inflation is probably going to rise a little bit beyond
where we are in a couple of months. We don't see an enormous spike driving
upward," said Patrick Fearon, an economist at A.G. Edwards & Sons Inc.
in St. Louis. "Where we are at right now is actually pretty modest
[inflation] from a historical standpoint. The economy can probably weather this
level pretty well."
Fearon said that last year the worry was deflation. It is associated with
weak economies, and marked by widespread and persistent falling prices that
slice into company profits. That forces businesses to fire workers who in turn
curb spending. The result: overall economic activity slows.
Experts say that businesses are passing along rising costs to consumers.
April marked the fifth consecutive month that consumers paid higher prices on a
range of goods and services from food and medical care to hotel rooms and
airfare.
Most notably, fuel prices have shot up and some experts see gasoline prices
rising beyond $3 a gallon this summer.
If prices climb too high, consumers who have driven the economy might pull
back, warned Steven Cochrane, senior economist at Economy.com in West Chester,
Pa.
"I think they will. I don't think they have yet," Cochrane said.
"We haven't seen any pull back in gasoline consumption. Right now, they are
swallowing" the increases.
Most experts believe the economy is humming along, and they see it continuing
to grow even though inflation has ticked up.
"It has been doing great," said James Glassman, senior U.S.
economist at J.P. Morgan Chase & Co. in New York.
Unlike other economists, Glassman doesn't believe the economy is experiencing
inflationary pressures, just "bottlenecks" in pricing that will sort
themselves out in due course. He said inflation is unusual this close to the
start of an economic recovery and with so many people out of work.
"We are not really looking at an inflation problem," Glassman said.
"I take it [NABE's findings] with a grain of salt. This is the thinking
that the trend is your friend."
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