In a worrisome sign, inflation is starting to ripple through the
US economy in the form of higher prices for products that businesses
use to make things.
Prices for aluminum, steel, paper, plywood, and plastic resins
are now ticking upward. Although it's not definite that consumers
will ultimately pay more for final products containing such
materials, at least some of these price hikes are likely to end up
on price tags in the months ahead, primarily because the economy is
running closer to capacity and because manufacturers appear to have
more leeway to raise prices.
In the latest sign that inflation is becoming more embedded in
the economy, the government reported Tuesday that the Producer Price
Index (PPI), a measurement of wholesale prices, leaped by 1.9
percent in September. Although much of this increase is attributed
to hurricanes and rising energy prices, the report also showed that
prices rose 1.2 percent for core intermediate goods, a key
measurement watched by the Federal Reserve. Often, price increases
at this level get passed on to consumers.
The pop in wholesale prices follows a jump in the September
Consumer Price Index of 1.2 percent. Together, the numbers confirm
that the Fed is correct to be worried about inflation, some
economists say. The latest report will help to persuade the Fed to
continue raising interest rates through next spring, possibly by as
much as a full percentage point above the current level, they add.
"The inflation number ensures [that] the Fed will keep tightening
and implies slower growth next year," says Scott Brown, chief
economist at Raymond James & Associates in St. Petersburg, Fla.
"These are pretty scary numbers."
The Fed is on alert
In recent weeks, Fed officials have been blunt about their
concern. In speeches, they indicated that the central bank needs to
ward off any surges in the cost of living. Fed Chairman Alan
Greenspan, in Tokyo on Tuesday, said the higher energy prices "will
undoubtedly be a drag from now on."
Although the inflation numbers are the highest since 1974,
economists say some factors that contributed to the rise may not be
repeated. For example, a big jump in prices of passenger cars and
trucks is a result of Detroit automakers ending many of their large
At the same time, gasoline prices have backed off from the record
highs set after hurricane Katrina roared through the Gulf Coast. In
September, gasoline prices peaked above $3 a gallon. Today,
according to GasPriceWatch.com, the national average is $2.66 a
gallon. "We may see energy prices level off," says Mark Zandi, chief
economist at Economy.com, an economic website.
Energy prices may continue to fall. …