More commentary on the spike in consumer prices, via today’s NYT:
“Consumer prices jumped much more sharply than expected in March, driven by increases for gasoline and clothing. The data reawakened worries about a return to higher inflation and higher interest rates. The Labor Department reported on Wednesday that consumer prices rose by 0.5 percent in March, which would translate to an annual inflation rate of more than 6 percent if it were sustained. The inflation rate for all of 2003 was only 1.9 percent.
More startling to many economists, the “core” rate of inflation that excludes the volatile categories of energy and food rose at the fastest rate in almost four years. . .”
Kudos to the Times Art department, for another good graphic:
Signs of Inflation . . .
. . . Are Worrying Markets
Source: NYT
Nationally, economists note other potential indicators of more broadly based inflation — like the sharp price increases in recent months for a wide range of commodities ranging from oil and beef to gold and steel scrap. Although Alan Greenspan, the Fed chairman, has said that commodity prices play a much smaller role than they once did in the overall chain of inflation, they can sometimes be an indicator of future price trends.
Prices for materials like steel and rubber have been driven in part by surging demand from China, but prices for many other products have been climbing as a result of faster growth in the United States and other parts of the world.
Let’s revisit this in six months; I suspect inflation may be more subdued by then . . .
UPDATE: April 15, 2004 9:24pm
Enough of you have asked why I wish to revisit this in 6 months that I feel the need to clarify my last cryptic comment:
In my opinion, Inflation is a function of DEMAND; Its too much money chasing too few goods.
The Fed, fearing DEflation, primed the economic pump by bringing rates to ultra low levels. These artificially low interest rates have also spurred a massive wave of new home construction and renovation, helping to inflate prices of dry wall, screws, lumber etc. That manipulated demand cycle is coming to its natural end due to rate increases.
Other inflation in the US is being not caused by domestic demand — Health care and education are going up in price because they can (as opposed to more demand/less supply). Most of the real inflation I see is due to China running a GDP of near 10%, and completely rebuilding their infrastructure.
So consider this: Rates are going higher, and at the same time, the massive stimulus package from last year starts to fade — once the pig is through the python — what is left?
An anemic, stimulus driven recovery, still producing little in the way of jobs, and with minimal
participation from Europe. That’s a formula for a very slow growth, non inflationary environment.That wouldn’t surprise me in the least, considering we are still sufferring through the after effects of the biggest speculative bubble known to mankind. Excess capacity, slack need for labor, anemic demand: Not the formula for inflation . . .
Source:
Unexpected Surge in Consumer Prices Fans Inflation Fear
EDMUND L. ANDREWS
New York Times, April 15, 2004
http://www.nytimes.com/2004/04/15/business/15ECON.html
As the FED begins to tighten, borrowing will increase as people and businesses realize this is their last shot at the low rates. The tightening will, in the short run, increase rather than decrease liquidity. I would not expect a back off in demand in six months. It will probably take 12 to 18 months.