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Energy increases have ripple effect

Los Angeles Times

Rising energy costs are causing Americans to pay more for such diverse products as cat litter and express delivery services, sparking concerns that protracted inflation might be returning as a primary threat to the U.S. economy for the first time in more than a decade.

Signs of higher inflation are beginning to multiply across the economy. Clorox Co. announced this week that it would boost prices on almost half of its products, on top of higher charges already planned or in place for its food containers, trash bags and liquid bleach.

FedEx Corp. said customers will pay higher fees to have their packages shipped as it would raise prices for many of its delivery services.

The National Association of Manufacturers said Monday many of its members were facing higher energy prices. Those could eventually be passed along to customers.

The prospect of higher inflation is pressuring the Federal Reserve to keep raising interest rates, which in turn could make consumers pay more for home mortgages and other loans.

— Warnings from several Fed officials about rising inflation helped spark a broad sell-off in the stock market this week, as many investors appeared to lose hope that the central bank might soon pause in its rate-hiking program.

The Dow Jones industrial average tumbled 123.75 points Wednesday to close at 10317.36, its lowest level in three months.

Inflation at the consumer level so far this year is running at a 3.9 percent annualized rate, the highest since 6.1 percent in 1990 ' when there also was a major energy price spike.

A gauge of prices paid by services companies ' including firms in agriculture, legal services, utilities and construction ' climbed last month to its highest level since the survey began in 1997, adding to concern that fuel costs are feeding inflation.

Many economists still are estimating relatively low inflation next year ' in the 2 percent to — percent range, as measured by the consumer price index.

Oil prices are expected to remain high at least for the remainder of the year, offering little relief to businesses and consumers.

If that happens, however, overall inflation could end up much higher. Allen Sinai, head of Decision Economics Inc. in New York, said higher energy prices could lift the overall inflation rate to 4 percent next year.

Although that would be a far cry from the double-digit inflation of the late-1970s, it could spook investors and consumers who have been used to low inflation for most of the last 14 years, he said.

Some economists fear that consumers and businesses might begin to expect higher inflation. That could lead to even more price hikes, starting an inflationary spiral similar to that of the 1970s that could eventually throttle consumer spending and stifle economic growth.

Some time has passed since price inflation last flared up in the U.S. economy, said John Lonski, chief economist at Moody's Investors Service. For now, he said, consumers are absorbing broadening price increases, but how consumers will respond to a protracted advance by final product prices is unknown.

Other experts, however, said recent inflation threats may be overblown, and will subside as the effects of Katrina and Rita wear off.

Prices for crude oil and gasoline have fallen from their post-Katrina peaks, amid evidence that consumers are scaling back driving and curbing purchases of gas-guzzling sport utility vehicles.

But many analysts still expect the Fed to raise its benchmark short-term interest rate to at least 4.5 percent next year, up from 3.75 percent now and from — percent in June 2004. Indeed, to maintain investor confidence amid growing inflationary pressures, the Fed has no choice but to continue boosting rates, some analysts argue.

Many years have past since investors last doubted the Fed's ability to control inflation, Lonski said.

The risk is that the Fed might overshoot and lift interest rates far enough to trigger an economic slowdown or recession. Indeed, virtually all post-war recessions ' including the last one in 2001 ' were preceded by Fed rate hikes.

Rising energy prices have yet to result in significant job losses or cutbacks in business spending outside of the auto and airline industries, Lonski said. Indeed, today's rising inflation is largely a function of strong demand in a growing global economy, not because of oil embargoes or energy shortages as was the case in the 1970s.

Rising petroleum costs are problematic for manufacturers such as Clorox, which must either absorb the higher charges or try to pass them along to consumers.

The Oakland, Calif.-based company said Tuesday it will raise prices on about 40 percent of its products, because of higher costs for fuel, raw materials and oil resin used in packaging. Some of its chief rivals, including Procter & Gamble Co. and Kimberly-Clark Corp., had already lifted prices this year.

Clorox said it would provide details later on specific brands and their price increases, scheduled to take effect Jan. 2.

The company had already raised prices on many of its goods. Its cat litter was already scheduled to increase 4.5 percent this month, following hikes of 7 percent on Glad food bags in August and 9 percent on liquid bleach in July. Glad trash bags and GladWare containers rose about 12 percent in February.

More key evidence of inflation will come Oct. 14. That's when the Labor Department releases the consumer price index for September.