Does Higher Inflation Loom?

Federal Reserve Board Chairman Alan Greenspan has been ridiculed by some Wall Streeters for raising short-term interest rates this year in the name of slowing the economy and fighting inflation.

But where’s the inflation? some frustrated economists ask. Certainly not in government gauges such as the consumer price index, which remain quite tame.

Some analysts, however, believe the Fed and the bond market are recognizing nascent signs of upward pressure on prices of goods and services that may not be readily apparent.

John Lonski, economist at Moody’s Investors Service in New York, cites the relative ease with which banks raised the prime lending rate last week to 6.25% from 6%, the first hike in the prime in five years. Although banks sought to justify the increase by citing the Fed’s half-point boost in short-term interest rates this year, the fact is that the move represents an increase in pricing power--something the banks haven’t had for years.

“If banks can lift the price of loans without being adversely affected by a loss of lending volume, then companies from other industries can do likewise,” Lonski says.

That renewed pricing power is already showing up in commodity businesses. After years of oversupply, prices of such diverse commodities as steel, chlorine and lumber are rising as demand catches up with or exceeds available supply.

The next pricing pressure could be in wages, which account for two-thirds of production costs. Lonski notes that the troubles of Mexico and other countries with low labor costs could eventually result in more job creation in the relatively safer (at least politically) United States--effectively transferring some wage-pricing power back to U.S. workers.