Inflation flickers again on horizon

It's been years since most Americans could say they're paying more for a cup of coffee, a hotel room, or a pair of walking shoes.

But now, the price of coffee is up as much as 10 cents a cup, the hotel room will cost an extra $6 a night, and a popular pair of walking shoes from France runs about $20 more than last year.

Unfortunately, these are all signs that an unwelcome economic guest - a higher inflation rate - has arrived at the nation's doorstep.

At the moment, the price increases are just a hint of the early 1980s, a period when Americans developed a buy-today-before-it-goes-higher mentality. Still, it is a significant enough development that the Federal Reserve, in its latest interest rate hike on Tuesday, expressed sharper concerns that are causing angst in the financial markets.

"Inflationary pressures are rising," says Richard DeKaser, chief economist at National City Corp. "Are we back worrying about accelerating inflation? I think we are."

The latest numbers give cause for concern. Over the past three months, wholesale prices are up at a 4.5 percent annualized rate. In the past, many of those increases were not being passed through to consumers. But that's doesn't seem to be the case now. In February, the consumer price index (CPI) rose 0.4 percent, the fastest pace in four months.

Behind the rising prices are a host of economic changes.

The US dollar has fallen against the euro, which makes imports from Europe more expensive. Import prices are up nearly 3 percent year over year and rising. "Basically, it is a mirror image of the second half of the 1990s, when we had the dollar rising and simultaneously falling import prices," says Mr. DeKaser.

At the same time, many weaker companies have gone out of business or been merged with other companies. This has increased corporate "pricing power," an effect the Fed has noticed. "Firms are telling the Fed this anecdotally, but it is not statistically well established yet," says Bob Brusca of FAO-Economics in New York.

The one area where it is showing up is energy, says Mr. Brusca, who worries about pricing pressures so early in the energy price run-up. "How much worse will it get?" he asks. Thursday morning, the oil futures market rebounded somewhat after a steep sell-off on Wednesday. An explosion at a BP oil refinery in Texas City helped push the price of gasoline up by almost 2.5 cents a gallon on the futures market on Thursday morning (see related story, page 2).

Although economists stress that it's still early to become scared of inflation, they also say its uptick may have some deeper implications for the economy. "How will the Fed respond?" asks Dean Baker, an economist with the Center for Economic and Policy Research in Washington. "Greenspan has the reputation as an inflation fighter."

The latest numbers have caused the bond markets to wonder if the Fed would raise interest rates by as much as half a percentage point soon. Before doing this, the Fed would want to warn the markets in advance - probably in its next Open Market meeting May 3. "He does not want to shock the markets," says Mr. Baker.

Inflation has not been much of a worry in the US for some time. According to InflationData.com, the rate of inflation has not been above 3 percent since 2001.

"The last time companies had pricing power was 1999 or 2000," says John Silvia, chief economist at Wachovia Corp. in Charlotte, N.C. "Since then they've been clobbered by imports."

In the past, many businesses absorbed modestly higher costs. For example, John McGrane, manager of Oyster Bay Marine Center, buys lines and ropes from New England Ropes. He says in the past, price increases have been about 1 percent. Now, he's looking at a 9 percent increase. And he says anything metal, such as the chains used in moorings, is rising in price as well.

"I personally think inflation is here, especially in the luxury industry," says Mr. McGrane.

In a dynamic economy, price changes go both ways. For example, in the latest CPI numbers, food at home declined in price even though meat, poultry, fish, and eggs were up in price. Televisions sets and DVD rentals were cheaper. The prices of computers and software fell as well. One of the reasons for the falling price of computers is the plummeting cost of DRAMs, which represent the memory aspect of the machines. In the past six to eight weeks, prices for the latest memory chips are down 20 to 30 percent and still dropping. The reason: A new and large factory in China is turning out more of the product than the industry needs. "Within two months the price drops will be passed on to consumers," says Tre' Cates, chief executive officer of Silicon Mountain Memory in Boulder, Colo., which buys the chips and puts them on boards. "When our competitors drop their prices, I have no choice but to drop mine."

But these days, there are more stories of rising prices. This would be especially true for luxury items imported from Europe. For example, Kobricks Coffee Co. in Jersey City, N.J., imports espresso from Italy as well as espresso machines. The company has had to pass on the price increases to clients, such as the Neiman Marcus chain, which sells the coffee in its upper-end stores.

It's not just those potent little beverages going up in price. Stuart Van der Schauw, general manager of the firm, says green coffee costs are up 100 percent since last year. His company has absorbed rising costs for paper cups, plastic bags to vacuum-wrap fresh-roasted beans, insurance, and labor costs. Now, a medium cup of Kobricks will cost $1.98 instead of $1.90. His explanation: "We have to make sure we can pay the bills."