RISMEDIA, Jan. 1, 2008-(MCT)-Has a generation of steady or falling prices come to an end? The government recently reported that for October, the consumer price index rose over the past 12 months at a pace of 3.5%, reaching a 14-month high. A year ago, the comparable inflation barometer read 1.3%.
Some economists believe the tide has turned.
“I think the 25 years of disinflation we’ve enjoyed since the early 1980s is over,” says Dan Laufenberg, chief economist at Ameriprise Financial Inc. in Minneapolis. “The best we can hope for is a period of relatively stable inflation.”
Some economists see two possible outcomes for prices: one in which businesses pass along their higher costs to consumers, and one in which they have to eat those costs, depressing profits throughout 2008.
In either scenario, inflation would become a headline issue.
“By February, inflation pressure or a corporate profit squeeze will push the housing bust off the front pages,” says Kenneth Goldstein, senior economist at the Conference Board, a business group based in New York.
Food costs, rising at a 4.4% annual pace in October, are the first in a long line of products that will reflect the effect of higher oil prices, in Goldstein’s view.
“What we’re seeing in the price of groceries, we’ll see tomorrow in the price of cars, clothing and everything else,” he says. “That ‘tomorrow’ could be January or next spring.”
However, Nariman Behravesh, chief economist at economic forecasting firm Global Insight, disagrees that oil will inevitably push other prices higher. “The evidence of any spillovers of higher oil prices into other parts of the economy is very, very limited,” he says.
With the sluggish economy muting consumer spending next year, import prices are unlikely to make a deep impact on inflation, he says.
Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, says the falling value of the dollar is likely to be a major driver of higher prices. He expects the 3.5% pace of inflation to continue in the fourth quarter.
“It could be a little bit higher,” he says. “Certainly, that doesn’t give the Fed a lot of comfort on the direction of inflation.”
Anderson expects the Federal Reserve, fearing the prospect of kindling inflation, to leave short-term interest rates unchanged at its next meeting, Dec. 11, despite calls for more aid to the housing industry.
He expects a weak dollar to persist, as international investors find more attractive venues for their cash.
“Foreigners are avoiding U.S. financial assets like the plague,” Anderson says. Nevertheless, he isn’t convinced that U.S. firms have enough market clout to pass along higher prices in the long run.
He expects the consumer price index to come in with a 2.2% year-over-year increase in 2008.
Copyright © 2007, Star Tribune, Minneapolis Distributed by McClatchy-Tribune Information Services.
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