Inflation Seen as Wholesale Prices Spurt
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 Labor 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.
The government’s index of producer prices jumped 0.5% in May, after increases of 0.4% in April and 0.6% in March. Wholesale food prices soared 0.9% in May, more than double April’s 0.4% rise.
Last month’s more rapid price rise confirmed a decided change in the inflation situation from earlier months. In each month for more than a year before March, wholesale prices had either risen modestly or declined.
“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.”
Donald Ratajczak, chief economist for the Georgia State University Economic Forecasting Project, added: “You shouldn’t jump off a bridge just because we got a big increase in food prices, but there are some signs that inflation is building up.”
4.5% to 5% Rate Seen
He predicted that recent price increases at the wholesale level would translate into an annual inflation rate at the consumer level of between 4.5% and 5% by the end of this year, up from 2.5% to 3.5% in the first six months of the year.
The Reagan Administration sought to put a brighter face on the price figures. White House spokesman Marlin Fitzwater noted that, without the more volatile food and energy prices, wholesale prices rose only 0.3% in May, in line with the performance of previous months. “Inflation remains low and under control,” Fitzwater said.
The inflationary 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, which 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.
U.S. Competitiveness
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 on to consumers. In addition, the Federal Reserve Board seems determined to combat economic overheating with higher interest rates.
At the same time, many analysts agree that the United States is confronting some of the strongest inflationary pressures in the last 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, said 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%.
Good News and Bad News
“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.
The possibility of shortages in 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 plastics 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 a current level of 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.
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.
At the same time, prices of energy products slowed significantly over the month, edging up 0.2% after a 3.1% jump in April, largely because of a decline in natural gas prices. However, gasoline prices soared by 3.8% in May, after a 0.7% rise in April.
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.”
Jonathan Peterson reported from Los Angeles and Art Pine from Washington.
