Inflation not roaring - but never far away

From an economic standpoint, think of inflation as a noisy refrigerator, or a ping in the engine: You're aware it's there, but it's not a big deal - yet.

That nagging noise surfaced once more on Oct. 19, when the government reported the September consumer price index (CPI) rose 0.4 percent, its highest rate in five months.

If the inflation rate were to remain at this level, it would be cause for concern - indicating close to a 5 percent annual rate.

But most economists expect prices will settle back down again to a 2.5 percent level, up about one percentage point over last year. Their reasoning: The latest inflation numbers seem to have a lot of "one time" price increases, such as a big hike by tobacco companies.

"Inflation is not dead, it's never dead, but it seems under control," says Robert MacIntosh, an economist with Eaton Vance Management, a mutual-fund company based in Boston.

Whether Alan Greenspan, Federal Reserve Board chairman, will interpret the numbers the same way is uncertain. Mr. Greenspan has been giving the financial markets jitters with his most recent warnings. To some Fed watchers, there are ominous signs the central bank will raise interest rates another 0.25 percent when it meets Nov.16.

"The Fed must demonstrate some concern with inflation - it doesn't want to be seen as losing credibility," says Lyle Gramley, a former Fed governor and now a consulting economist with the Mortgage Bankers Association in Washington.

If the Fed were to raise interest rates, it would be the third hike this year. The rate increases would take back the three reductions made last year, when the economy was weaker. "Greenspan has decided to worry about the fast growth," says Scott Grannis of Western Asset, a Pasadena, Calif.-based money manager. "He seems concerned that tomorrow we'll have inflation if the economy does not slow down."

There are signs the economy is beginning to feel the effect of those higher rates. The government reported that housing starts fell 3.2 percent in September. Mortgage rates are now around 8 percent - a level that is starting to reduce new mortgage applications. Despite these signs, "the unrelenting strength of the economy will probably lead the Fed to tighten policy at the Nov. 16 meeting," says Gerald Cohen, senior economist at Merrill Lynch & Co. in New York.

Before the Fed meets again, however, it will have some more economic statistics to mull over. In November, the government will report on the October unemployment rate as well as the October producer price index. Economists will be watching the PPI numbers, because last week the government reported prices rose at a 1.1 percent rate in September. This news contributed to a bad week on Wall Street, which posed its worst weekly loss in 10 years. On Oct. 19, the Dow Jones Industrial Average was relieved by the CPI report and recovered sharply in early trading.

But the US may have already seen the best of the inflation news. The dollar has started to weaken compared with other currencies as the world economy begins to reawaken, which will make imports more expensive. "Prices aren't declining anymore. Things will get a little worse," says Mr. Gramley.

In fact, demand for some basic commodities is starting to pick up. There are increases in the prices of crude materials such as scrap metal and raw cotton. For the moment, many companies are absorbing these increases because of competition from abroad. But if foreign prices start to rise, businesses are expected to pass on their higher costs.

One of those higher costs is energy, which makes up 6 percent of the CPI. The price of crude oil has nearly doubled since last year, another indication of a recovery in the world economy. In the latest CPI numbers, oil prices continued to rise, but at a more modest rate.

For many Americans, the most noticeable uptick in prices is at the gas pump. Over the past month, fuel prices have risen about 8 cents a gallon. Peter Moi, a driver with Lotus, a limousine company, says he is now paying $1.63 a gallon to fill up his 1992 Lincoln Town Car. Earlier this year, he was paying only $1.35 a gallon for premium fuel. So far, he says, he hasn't been able to pass on the higher prices.

Truckers are also in a bind. Over the past six months, Bill Schulz, the president of Dutchman's Transport Inc., in Hanover, Md., has watched as the price of diesel fuel has gone from $1.08 per gallon to $1.45. He figures the higher prices are now costing him an extra $35 to $40 per fill-up - a cost he can't get back because of competition. "We're feeling it and feeling it bad," he says.

Smokers are also feeling the sting of higher prices as tobacco companies raise prices to pay for a $206 billion settlement with the states to compensate them for past Medicaid costs. Standing outside a Manhattan office building, Josie says her cigarettes are up about 50 cents a pack.

Despite some higher prices, most Americans are not complaining about inflation. Typical is Linda Cameron, an interior decorator in Bethlehem, Pa. Her two teenage children have started to buy more expensive clothing. "But the prices aren't dramatically different than the last couple of years," she says. "Other than gasoline, we're not really aware of any price increases. I don't feel as if inflation is back."

(c) Copyright 1999. The Christian Science Publishing Society