U.S. Inflation Expands Beyond Food and Fuel

Overall, import prices rose 1.4% in February, the fifth straight month of increases over 1%. Deutsche Bank expects the core producer price index, a measure of wholesale inflation, to rise to 3% by year’s end, with consumer prices up more than 2.1%. That’s double the current inflation rate.

The expected increase may seem to add insult to injury, considering that imported petroleum prices already have grown 20.6% over the last year, according to the Bureau of Labor Statistics. While energy is excluded from the measure of inflation known as the core consumer price index, the higher fuel and transportation costs also end up increasing costs throughout the supply chain — and leading to higher consumer prices as well.

Domestic Prices Likely to Rise Too

Can consumers avoid this inflation by simply buying products entirely made in the U.S.? Probably not. If you think you’ll just give up French cheese and buy Californian instead, for example, consider this: When domestic manufacturers see competitors’ products rise in price because of the weakening dollar, they tend to raise their prices, too.

“If Toyota’s prices are going up because of an exchange-rate move, then Ford has a little more leeway on a domestically produced vehicle,” Riccadonna says. “What this means is inflation is absolutely going to trend higher over the course of the year.”

Logic — and the rule of supply and demand — would suggest that as import prices go up, American consumers would buy fewer of them. But that’s not what’s happening. According to the U.S. Census Bureau, the country imported $166 billion worth of goods in January 2011, compared with $136 billion in January 2010.

Why? While imports are becoming more expensive as the dollar weakens, the U.S. economy is also on the mend. Both consumer spending and business spending is picking up, which has raised the demand for imports, even at higher prices.

Riccadonna says a more important metric than the dollar’s value is disposable income. Incomes have been rising for the past year, and that has kept consumers’ purchases up despite the higher prices for oil and food. If incomes were not increasing, the economy might have ground to a halt, he says, instead of merely experiencing inflation.

Article source: http://www.dailyfinance.com/story/market-news/consumer-prices-are-rising-and-not-just-for-food-and-fuel/19896433/

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