Surge in energy prices stokes inflation

John W. Schoen Senior producer • Profile • E-mail

When the economy slows down, the resulting drop in demand normally takes some of the pressure off inflation. But these are not normal times: Even as the economy is slumping, oil prices are rising and food prices are jumping.

All of which could spell more trouble for consumers in the coming months. Tax filers this week can look forward to some relief from a massive government rebate program. But that one-time shot in the arm won’t help consumers — or the economy — if energy and food prices keep rising.

On Tuesday, oil prices surged to a new high, passing $113 a barrel, and the government reported that prices at the wholesale level jumped 1.1 percent in March.

“These are going up way too rapidly,” said economist Joel Naroff of Naroff Economic Advisors. “This is the money that the average person has to spend, and as a result they don’t have a lot of money left over for other things.”

Food and energy prices tend to move up and down more quickly than other goods, but lately they’ve only been moving in one direction. In the last three months, gasoline prices are up by a third and food prices are up 10 percent.

Analysts take some comfort in the fact that the so-called “core" inflation rate has — so far — remained in check. The hope is that higher food and energy prices haven’t yet spilled over into the prices of other goods.

But if you break down the list of those goods, the price increases have been mildest in so-called capital goods — business machinery and equipment. Price of consumer goods other than food and energy are up 5.5 percent in the past three months. Analysts are expecting that trend to show up in the Consumer Price Index due out Wednesday.

There are multiple causes to the current rise in prices. A falling dollar increases the cost of the steady stream of imported consumer goods made overseas. As the dollar falls, it takes more of them to buy goods priced in stronger currencies. Developing economies around the world are bringing increased demand for raw materials.  Rapid expansion of ethanol production in the U.S. has diverted supplies of corn from grocery stores to gasoline pumps.

Underlying all of these is the rising cost of energy, according to Stuart Hoffman, chief economist at PNC Financial Services Group.

“A lot of this gets right back to oil at $113 barrel and that, to me, is just reverberating through the inflation pipeline — and not just in the in the U.S.,” he said. “We’re seeing global problems on inflation, particularly on the food front in countries where their subsistence level (income) doesn’t give them any room for leeway.”

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