To Consumers, Inflation Is a Worry That’s Inflated

While Wall Street and Federal Reserve Chairman Alan Greenspan see signs that inflation might break loose, another key economic player generally has adopted a “What? Me worry?” attitude: the American public.

The threat of widespread price increases, by various accounts, remains no more than a mild concern for consumers. Their relaxed attitude appears to stem from the nation’s general prosperity, the ability of many businesses to absorb cost increases without passing them along to customers and other factors that postpone the impact of rising consumer prices.

Catherine Rosser, a manager for a San Fernando Valley grocery named West Hills Apple Market, largely reflects the mood. She said she has seen no worrisome signs of inflation, either at her store or in her personal shopping.

“I have seen items in our store that haven’t gone up in 10 years. That’s not true for everything, but I don’t see anything outrageous,” Rosser said.

At the same time, mounting statistical evidence suggests that inflation is picking up. The latest U.S. figures show that consumer prices climbed at a 5.8% annualized pace in the first three months of this year, more than double the 2.7% for all of 1999. Employers, for their part, are shouldering sharply escalating costs for health insurance and are paying out more in wages, too.

Southern California, which through much of the 1990s enjoyed lower inflation on consumer goods than the rest of the country, lately has been keeping pace with the nation largely as a result of substantial price hikes for housing and gasoline.

Still, in any dynamic economy, there always are some price increases--and decreases--on selected goods and services. These days relatively few people, besides those who are shopping for a new house or apartment, seem to sense that price increases are either widespread or problematic.

“A person on the street would see prices on a couple of items they buy going up, but if they go into Best Buy or Circuit City, they’ll also see big-screen TV or home-computer prices that have fallen at least 50% over the last two years,” said Lee Ohanian, a UCLA economics professor who has written about inflation.

This widespread sense that inflation remains tame appears to be feeding confidence among consumers and businesses in the economy. And that, in turn, may be inducing people to keep buying and spurring businesses to continue investing.

When researchers with the New York-based Conference Board try to determine through their monthly consumer sentiment survey whether people fear that price increases are spreading, “the answer is a big ‘no,’ ” said Ken Goldstein, an economist with the organization. He said consumers have indicated little or no change in their expectations of inflation for nearly three years.

Consumers may be relatively sanguine in part because U.S. wages, until the burst of inflation in the first quarter of this year, have modestly outpaced price increases since 1996. That followed more than two decades of generally declining real wages. Consumers “are happy to grumble about how little their pay increases are, but they’re not grumbling about losing money,” Goldstein said.

A feeling of prosperity probably has helped companies such as Continental Refrigeration Heating & Air in Culver City impose modest price increases without antagonizing consumers. Brad Freedman, the company’s sales manager, said costs for the air conditioners and heaters that his company buys from manufacturers have risen slightly, “and we’ve gone up our fraction to match.”

Those small price increases, he said, haven’t slowed business. “The general public seems to have more cash in its pocket, so it has less of an effect,” Freedman said.

Another reason consumers may be laid-back about inflation, economists say, is that many people don’t remember, or weren’t around for, the devastating double-digit inflation of the 1970s, much of it driven by oil prices. Thus not even the recent reprise at the gasoline pumps has changed the thinking of consumers, who continue to buy large, fuel-thirsty vehicles at a rapid pace.

For people who make buying decisions for businesses, concern about inflation appears to have grown this year. Still, a new poll by the National Assn. of Purchasing Management showed that roughly three-quarters of the businesses it surveyed say they have passed along few, if any, increases to their customers.

In addition, the companies reported that their inflationary pressures began easing in April and that they are optimistic about business prospects for the next 12 months.

How do firms manage to absorb higher costs instead of passing them along to consumers? Some change their business practices or the products they buy. For instance, Pasadena-based Sparkletts redesigned its water bottles last year to use less plastic, which had soared in price.

The company, a unit of France’s Groupe Danone, also sidestepped surging gasoline costs by converting nearly 50% of its delivery trucks in Southern California to propane-burning engines, said Mike Riley, group vice president for manufacturing.

Other firms protect themselves from price hikes, at least for a while, through long-term, fixed-price contracts for supplies.

Some economists have theorized that the expectations of consumers and employers on inflation is, in itself, an important force. If there is widespread anticipation that prices will rise, the traditional reasoning goes, workers will push harder for higher wages and businesses will look for ways to pass along higher costs to their customers.

Today, however, many economists believe that the effect of such expectations has been muted. For one thing, U.S. unions no longer have the power they once did to win sizable wage increases. Businesses are subject to tougher global competition and thus are hindered in passing along price increases unless they are dictated by worldwide markets.

Confidence also has grown in the ability of the Federal Reserve to contain inflation through tight monetary policies.

Among consumers who are concerned about inflation, rising real estate costs often are an issue.

Even so, consumers normally won’t bear the higher expenses until the next time they buy a new home or renegotiate their apartment lease.

“People will feel them [higher real estate costs], but it’ll take awhile before they do,” said Lisa Grobar, director of the Cal State-Long Beach Economic Forecast Project.

What’s more, food and beverage costs--among the most obvious barometers of inflation for consumers--have remained under control. Nationally, they climbed at an annualized rate of 1.9% in the first quarter of the year.

Economists say that if inflation strikes, it probably will be most noticeable at first in services rather than in manufactured products. Among other reasons, wages and other employment-related expenses ordinarily account for a larger portion of the cost of a service than of the cost of a manufactured item. Also, services are less affected by global competition than are manufactured products.

Phil Kash, a semiretired construction contractor from Granada Hills, said he has witnessed that. He said the cost of parking at one hospital he regularly visits has doubled recently, and that he also has started to pay higher out-of-pocket costs for his cardiac fitness rehabilitation program.

Inflation generally, he said, “hasn’t ballooned, but I dare say that I expect it.”

But many, and perhaps most, consumers are more upbeat. “I’m not hearing anything that’s making me fearful,” said Rosser, the grocer. “We’ve had a good economy for a long time.”