Is the Inflation Genie Out of the Bottle?

By Dr. Lynn Reaser

Last week’s inflation reports were a little disarming.  Consumer prices jumped 0.5% between November and December (an annualized rate of 6.0%), while producer prices leapt 1.1% (an annualized pace of 13.2%).           Is this an anomaly or means that the Federal Reserve’s worries during the past couple of years about deflation may now be off the mark?

It comes as a surprise to no one who has filled up at the pump recently that gasoline prices have surged as oil prices have raced past $91 a barrel.  The cost of gasoline advanced 8.5% last month and accounted for four-fifths of the overall rise in consumer prices.  Air fares also rose, reflecting in part the impact of higher fuel costs.

Outside of energy, consumer prices remained relatively tame.  Food, apparel, rent, and even health care recorded relatively modest increases in December.  Prices of electronics products and telecom services fell.  Outside of energy, the area showing the greatest upward cost pressure remained education.

Unit labor costs, determined by wages and productivity, have frequently been one of the primary drivers or indicators of U.S. inflation pressures.  Wages ended last year up less than 2.0% and productivity gains have remained strong.

Yet, cost pressures appear to be brewing.  Prices of various commodities, ranging from cotton to copper, have been soaring, pressed by strong demand from China and other emerging market economies.  Companies will either pass on some of those cost increases or be forced to take sizable cuts in their profit margins.  Some of both seem likely.

On balance, look for inflation at the consumer level to remain relatively benign this year, but the greater risk as the economy recovers would seem to be inflation than deflation.


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