November 20, 2007
Tuesday AM

Has a generation of steady or falling prices come to an end?

The government reported last week that for October, the consumer price index rose over the past 12 months at a pace of 3.5 percent, reaching a 14-month high. A year ago, the comparable inflation barometer read 1.3 percent.

Some economists believe the tide has turned.

"I think the 25 years of disinflation we've enjoyed since the early 1980s is over," said 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," said Kenneth Goldstein, senior economist at the Conference Board, a business group based in New York.

Goldstein is betting that companies will be successful in passing along higher prices to customers, rather than having to tolerate falling profits.

He points to the auto industry to explain his conclusion.

In the past year, the cost of labor for automakers has climbed 4 percent, while the prices of metals and other materials have risen even faster. Meanwhile, the average price of a new car has fallen 1.1 percent.

"How can a company make money when the cost of the materials is up and the cost of labor is up and (products) sell for less? They can't," Goldstein said. "They're going to have to raise prices."

Laufenberg agreed. "Can they raise prices? They can if people are a bit more tolerant or more expectant of price (increases)."

Crude oil prices, which have climbed to more than $90 a barrel, have had less impact on the consumer price index lately than they will in 2008, he argued.

"That's still on the tanker," Goldstein said. "That price hasn't gotten to the refinery yet, much less the gas pump."

Food costs, rising at a 4.4 percent 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 said. "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 said.

With the sluggish economy muting consumer spending next year, import prices are unlikely to make a deep impact on inflation, he said.

Scott Anderson, senior economist at Wells Fargo & Co. in Minneapolis, said the falling value of the dollar is likely to be a major driver of higher prices. He expects the 3.5 percent pace of inflation to continue in the fourth quarter.

"It could be a little bit higher," he said. "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 said.

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 percent year-over-year increase in 2008.

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