Anyone who feared rising inflation after this week’s startling report on producer prices can breathe a sigh of relief knowing that consumer prices barely budged last month outside the energy sector. But don’t celebrate just yet: Rising energy prices are pinching consumers this colder-than-normal winter, putting yet another damper on an already sluggish economy.
Retail energy prices rose 4 percent in January alone and are 14 percent above year-ago levels, according to Friday’s Consumer Price Index. A strike in Venezuela, unusually cold weather in much of the country and the looming prospect of military action in Iraq all are playing a role in driving up the price of oil and natural gas, analysts say.
Volatile energy prices routinely are filtered out of monthly price reports to get a measure of “core” consumer inflation, which was a nominal 0.1 percent last month. But persistently higher fuel prices have the effect of a not-so-hidden tax increase, robbing consumers of otherwise discretionary income and denting confidence every time motorists drive by the corner gas station, said Ethan Harris, chief economist for Lehman Bros.
“It’s creating a new source of drag on the economy,” said Harris, estimating the increase in energy prices will trim about 0.5 percent from first-quarter growth, which is expected to be about 2 percent.
“It’s been very broad-based, so it’s a pretty significant hit,” Harris said. “There is also a psychological effect that goes along with it. No other price is so widely visible.”
PAYING UP AT THE PUMP
Gasoline pump prices are up about 23 cents a gallon since December, leading Merrill Lynch economists to estimate the nation’s $10 trillion economy is growing at a rate about 0.3 percent slower than it otherwise would have. (Economists generally figure that every penny-a-gallon increase in the price of gasoline drains a little more than $1 billion in consumer spending power over the course of a year.)
And it could get worse before it gets better, with oil prices likely to rise above their 1990 peak of $41 a barrel from the current $35 even in a “quick war,” according to the Merrill analysis.
None of this is to suggest that rising oil prices will knock the struggling economy back into recession, which is still seen as unlikely. Oil prices would have to rise above $60 a barrel to begin to approach the energy price shocks of the 1970s and 1980s, according to the analysis.
But Bill Dudley, chief economist at Goldman Sachs, warns that inflation, driven by energy prices, could be “sticky” in coming months, posing a long-term challenge to the Federal Reserve and other economic policy-makers.
Given the relatively high unemployment rate, limited wage pressure and slow economic growth, there is little risk of a lasting increase in inflation over the near term, Dudley and other said. Last month’s 0.9 percent increase in core producer prices and 0.1 percent increase in core consumer prices suggest that businesses face a substantial “margin squeeze” and are unable to pass along their price increases, said Gerald Cohen, senior economist for Merrill Lynch.
But over the longer term, “there are some more serious inflation risks,” Dudley said in a report.
For one thing, the Fed apparently has been spooked by the prospect of Japanese-style deflation and may be willing to tolerate a higher sustained inflation rate to ensure steady economic growth, Dudley said. Second, last year’s record trade deficit makes it clear the dollar, which has fallen about 5 percent over the past year, “will need to fall considerably further to restore U.S. trade competitiveness,” leading to higher import prices, he said. Finally productivity growth could slow as the pace of deregulation and trade liberalization slows from the 1990s.
Last month’s 1.6 percent increase in producer prices — the biggest monthly jump in 13 years — stole most of the economic headlines this week but the number was widely seen as an anomaly. Wholesale fuel prices rose about 15 percent last month, and prices for passenger cars and light trucks were up by about 3 percent, according to government figures. But the Labor Department analysis fails to take account of the low-interest loans that keep the effective price of passenger vehicles relatively unchanged, said Harris of Lehman Bros.
Other recent indicators hint at persistent strength in the economy, including a report that housing starts surged in January to their strongest pace since the late 1980s. But as the nation’s focus increasingly turned to the prospect of war in Iraq in late January and early February, the economy appears to have slowed, said Harris. Regional manufacturing indicators in the mid-Atlantic and New York regions turned down in early February, and a President’s Day blizzard brought retail activity to a grinding halt for several big shopping days in much of the nation.
“Generally the data for December and January look OK, but we’re already getting hints that February is going to be a lot weaker,” Harris said. “You can kind of feel the economy slowing down. ... I think we’ll get softer data in February and March, then hopefully some positive resolution around Iraq and we’ll begin picking up again.”
But he cautions that a “bad war” or even no war at all could leave the economy hanging fire, stuck in slow-growth mode for much of the year.
“It’s hard to see how the economy gets back onto its feet with Iraq hanging in the background,” he said.