Inflationary Pressures Held Stiffest in Years
A strong upward pattern in prices of industrial raw materials and other basic commodities in recent months suggests that, after years of near slumber, inflation is once again emerging as an important factor in the U.S. economy.
The latest evidence that inflation is smoldering just below the consumer level came Friday with a Commerce Department report showing that wholesale prices, led by food costs, rose at a 5.8% annual rate in May.
The government report, combined with vigorous manufacturing activity and soaring prices for such basic materials as plastics and aluminum, has convinced many economists that inflation is leaving the 3% range of recent years and rising to a level of 5% or higher.
“There has been pressure on prices from various sources,” said Harold C. Nathan, a vice president and senior financial economist with Wells Fargo Bank in San Francisco. “It’s not explosive pressure, but I think we’ll see continued upward momentum.”
The momentum arises in large part from a robust U.S. manufacturing sector. Many factories are running at levels not observed in years, with the aid of a weaker dollar that gives U.S. producers price advantages over their foreign rivals. Moreover, there are signs that the three-year fall in the dollar’s value increasingly is being reflected in higher import prices. Clothing prices, for example, which include huge import volumes, rose an extraordinary 2% both in March and in April.
Yet few experts foresee the kind of rampant inflation that raged in the late 1970s. Labor costs have risen only modestly this year. As U.S. firms battle to regain their competitiveness, they do not inevitably pass price increases in basic materials onto consumers. In addition, the Federal Reserve Board seems determined to combat economic overheating with higher interest rates.
Strong Inflationary Pressures
At the same time, a variety of analysts agrees that the United States is confronting some of the strongest inflationary pressures in several years. “There is absolutely no evidence that we’re in a wage-price spiral right now--but there are things to worry about,” said Sandra Shaber, an economist with the Futures Group, a private consulting firm in Washington.
One area that economists are watching closely is basic materials used in manufacturing, such as metals and plastics. For example, the price of plastic resins used in automobiles, toys and construction products jumped 21.5% from May, 1987, to May, 1988, according to Frantz R. Price, a commodities analyst with the WEFA Group, economic consultants in Bala-Cynwyd, Pa. In the same period, aluminum mill products went up 26.5%; copper and brass products soared 32.5%.
“More and more these days, the good news about the economy is being translated into bad news about inflation,” said Price, whose firm predicts an upward drift of inflation to 5% by 1990.
Shortages of Key Materials
The possibility of shortages of key materials also remains because some of the industries that produce them are already running at virtually full bore. In the paper industry, for example, which is operating at close to 100% of capacity, prices have risen 11% over the last 12 months. Moreover, American industry’s ability to meet any added demand is limited by the fact that various industries, such as chemical and plastic producers, methodically cut back their size in recent years, choosing to be lean and mean rather than risk being too big and wasteful.
As a result, said Price: “An increase in demand beyond what we’re experiencing now could add significant upward pressure on prices.”
In Friday’s Commerce Department report, food prices--which tend to bounce around from month to month--loomed as a key factor behind inflation, at least in the short term. The category jumped 0.9% in May--which calculates to a double-digit annual rate--reflecting higher prices for a variety of products, including pork, processed chickens, bakery products and vegetables.
Effects of Drought
Analysts were particularly interested, however, in the potential effects of a two-month drought in the Farm Belt that threatens this year’s harvest of such basic grains as soybeans and corn at a time when farmers have been taking acreage out of production.
Soybeans, for example, have risen from $5 a bushel last summer to near $9 a bushel, said Stanley M. Bedows, a commodity futures trader with the firm of Dean Witter Reynolds in Chicago. Corn has gone up from $1.50 a bushel to about $2.50.
‘99% Dependent on Weather’
Future price increases are “99% dependent on weather conditions right now,” said Bedows, noting that the period from now through August would be crucial for the grain crops.
More fundamental to the long-term outlook, however, is the performance of manufacturing. Indeed, the mixed news represented by a booming factory sector was underscored Thursday by a Commerce Department survey that showed businesses had increased their plans to buy equipment by a brisk 10.7% this year, even higher than the 8.8% increase they had forecast a few months ago.
Wells Fargo’s Nathan described the news as “both encouraging and inflationary at the same time.”
