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High prices, jumpy economy Costs: Look out. After staying low for years, inflation seems poised for a comeback, though many economists predict it will be a short-lived return.

Will she or won't she?

Mary Brady might have to raise prices at the Catonsville Bakery & Delicatessen. "Wheat price at highest cost in 22 years," her flour vendor's bill warned last week. "Flour prices will jump."

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"Flour is our main thing here," said Brady, who buys more than a ton of it each week. "It looks like it's really going to go up. And people don't think you should raise your prices."

If the cost of a Catonsville Bakery doughnut is to stay 50 cents for much longer, wheat prices will have to go back down. Or the bakery will have to accept lower profits. Or a little of both.

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So goes the economy. After years of languishing in a corner, inflation may be growing claws and teeth.

Life's staples -- wheat and fuel oil -- cost at least a fourth more wholesale than they did a few months ago. Pump prices for gasoline are about $1.30 a gallon. Wages, which make up more than half the expense of finished goods, may be going up, too, according to last week's government reports.

Investors, fearful that inflation will corrode profits, are roiling the stock and bond markets.

"Inflation statistics are the statistic du jour these days," said Alan Gayle, a money manager and senior vice president for Capitoline Investment Services in Washington. "Our sensitivity to inflation has been rekindled."

But many economists aren't so concerned as Wall Street seems to be. They believe spikes in wheat and oil prices are only temporary. And despite other rumblings and vapors from the inflationary vents, they think powerful forces will keep a lid on prices for a long time.

One of the most powerful wears dark suits, dates Andrea Mitchell and shows up on Capitol Hill to be grilled about monetary policy every few weeks.

"You just had the renomination of Alan Greenspan" as chairman of the Federal Reserve, said Richard Belous, chief economist for the National Planning Association. "Alan Greenspan is not going to let inflation get out of control."

But this year has offered new reasons to believe that it could.

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In 1995, U.S. retail prices increased by less than 3 percent for the fourth year in a row. That's the best record in three decades and a sharp contrast from the 1970s and early 1980s, when oil prices were bubbling over and unions regularly demanded, and obtained, 5 percent-plus annual raises.

In 1979, inflation was 11.3 percent; 1980, 13.5 percent.

But wheat prices are up more than 25 percent since March, with futures prices for July delivery rising from $4.41 a bushel to a close of $5.62 last week.

At one point late last month, the July contract hit $6.28. Corn and other grains have soared, too.

And so have price tags on petroleum and its derivatives. Wholesale gas costs have increased by almost 20 percent since January.

Grain and petroleum pervade U.S. commerce, from Hostess Twinkies to Power Ranger action figures. But they and other commodities are less important these days than the price of labor, since consumers buy more services and relatively fewer goods. Wages also could be stirring. Unemployment is low, which means employers may have to bid higher for hires. Factories are close to running at full tilt. Congress might raise the minimum wage.

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"With the pickup in growth and the unemployment rate as low as it is, and manufacturing capacity around 83 percent, it's possible that there will be increased fears that inflation will pick up," said Christine Chmura, chief economist for Crestar Bank in Richmond.

One item last week that worried many inflation hawks was a report that said salaries and wages have been rising faster recently than at any time in four years. The Labor Department's employment-cost index, considered the best measure of labor costs, showed that wages and salaries went up by 3.2 percent for the year ended in March.

The news that the U.S. economy grew at a decent, 2.8-percent annual rate in the first quarter also fueled inflation fears. Prices generally rise faster in growing economies than in stagnant or shrinking ones.

But several important characteristics of the economy have not changed, analysts say. And some that have are probably temporary.

"What we're seeing are sort of one-time factors that are going to cause inflation to pick up just temporarily, but I don't see these as permanent factors contributing to an acceleration of inflation," said Douglas Kinney, principal forecaster for Baltimore Gas and Electric Co.

As ever in commerce, commodity-price spikes can be blamed on low supply, high demand or both.

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Both refiners and grain shippers had already sharply cut their stocks last year to save on inventory costs. Oil producers also fear that Iraq will soon again be allowed to export crude, so they don't want to fill storage tanks now if new supplies are likely to deflate prices later.

At the same time, a hard winter sucked more oil and gas than usual from refineries, further draining the supply. Drought in the U.S. Wheat Belt and higher feed-grain exports promise to have the same effect on grain silos.

The result: rocketing prices.

But commodity squeezes often dissipate just as quickly as they come, economists said, and prices descend as steeply as they rise. The petroleum industry has plenty of capacity to boost production, meet demand and eventually defuse prices, analysts believe. Midwestern rains last week have already helped pull grain prices down from their highs.

"Unless we foresee that crop yields are going to get progressively worse in the future and that there is going to be a growing scarcity of commodities, this is not something that's going to contribute to an accelerating of inflation," Kinney said.

He is skeptical of the argument that rising oil use in developing countries will significantly crimp supply over the longer term. Even as countries such as Taiwan and Bolivia are burning more oil, he said, processors are getting more efficient at extracting it from the ground and turning it into fuel.

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And although last week's employment-cost report raised eyebrows, the 3.2 percent raise that it showed for workers was far below the wage inflation of the 1970s. Moreover, the report showed a slight decline in the value of worker benefits.

Mr. Gayle doesn't rule out upward wage pressures at some point, but, he added, "I think we can look at these wage numbers with several grains of salt."

Meanwhile, many analysts believe that, despite the first quarter's strength, U.S. growth will slow, and demand for most products -- oil, grain and labor included -- will wane. A report issued Friday supported this view by showing that the economy added only 2,000 jobs in April.

Even if the economy does heat up, business analysts and economists share a firm faith that Fed chief Greenspan will raise short-term interest rates to cool it off and tame inflation.

By the time 1996 is over, few believe inflation will have gotten much worse. "On the high side I could see it going to 3.25 percent, but I would expect inflation to come in at around 3 percent this year," Chmura said. Last year it was 2.5 percent.

Perhaps the biggest obstacle to higher prices are the people ultimately asked to pay them -- consumers. Stores have an extremely hard time passing higher costs to customers, retail experts report. Discount chains rule. Few people pay full markup anymore.

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Why? Consumers are still pinched. Their incomes have been stagnant for years. They're competing against workers worldwide for jobs. They're getting laid off in droves. They're saving more for retirement. And unions have lost the power to twist big pay increases out of employers.

"We've had fundamental changes in the economy, particularly in labor," Belous said.

Brady, of the Catonsville Bakery, knows as well as anybody that the day of the regular, 10 percent price boost hasn't returned. And she knows what to do with those higher flour costs.

"Try to eat it," she said. "We have to. If we raise prices you just can't do it. We're working short-handed now trying to keep costs down. But we're all getting worn out."

Pub Date: 5/05/96


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