Yet Another Sign of Inflation Ahead ; US Producers Paid More for Raw Materials Last Month, So They May Charge More for Final Products in Months to Come
Ron Scherer writer of The Christian Science Monitor, The Christian Science Monitor
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 discounts.
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. …