The Inflation Specter Cometh

The Inflation Specter Cometh

Although the oft-heard complaint "Everything is just more expensive these days" is off the mark (think computers, clothing, etc.), inflation concerns have crept back into the forefront. Even a few members of the Fed's Open Market Committee have piped up about the potential for rising inflation expectations. Last week's data release on wholesale prices in April highlighted the risks inflation still poses to the economy. Underneath the surface of what was generally a tame reading for the overall producer price index, the details indicated spiking prices for raw materials have slowly started to bleed through the production pipeline.

Not to minimize the pain consumers are feeling at the pump or at the supermarket checkout counter, but the dreaded price pass-through of materials price hikes to a broader array of goods and services so far has not been a huge deal; unfortunately, times may be-a-changin'. One example: citing (subscription required) the soaring price of crude oil and natural gas, Dow Chemical announced it will raise product prices by as much as 20 percent in the coming months.

We have reached the point where the role of expectations, the Fed's new concern, takes on relevance. Right now the sluggish labor market is putting downward pressure on wages, thereby acting as a counterbalance to product price increases. However, should consumers and businesses take it as a given that growth in prices will outstrip gains in wages and sales, they will demand higher wages and product prices and set off a vicious inflationary cycle. While this represents the textbook worst-case scenario, it doesn't fall out of the realm of possibility. Normally, something like a candy bar might be a good thing to calm your nerves at a time like this, but skyrocketing cocoa prices (subscription required) make it a less affordable option.

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