Jim Sinclair: Disinformation control

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Inflation hits the family dinner table

After years of stability, prices rise
on key items, hitting pocketbooks and economy

By Ron Scherer
The Christian Science Monitor
Friday, April 30, 2004

http://www.csmonitor.com/2004/0430/p03s01-usec.html

NEW YORK -- Many of life's necessities are becoming
more expensive.

Let's start with breakfast. Eggs: up 5.2 percent so far this
year. Butter for your bread: up 62 percent.

A glass of 2 percent milk to wash it all down: It may rise
as much as 50 cents a gallon next month.

Time to head to work: Filling up the gas tank now costs
30 cents a gallon more since January.

After more than a decade of quiescence, inflation is
returning -- eating away at family pocketbooks and
rippling through almost every segment of the American
economy.

The latest evidence came Thursday, when the
government reported that the first quarter Gross
Domestic Product grew at a steady 4.2 percent rate,
but inflation virtually doubled: from 1.2 percent
annually at the end of 2003 to 2 percent now.

The rate would have been much higher if it were not
for some big-ticket items, such as automobiles and
computers, which came down in price. In fact, in the
category most families would relate to -- food and
gasoline -- prices rose at a 5.3 percent annual rate.

Those numbers echo the more widely watched
Consumer Price Index, which shows inflation running
at 5.1 percent annually. Those are the highest numbers
since 1990.

The inflationary pressures could well lead to the end
of a historically low period of interest rates. Although
no immediate rate hike is expected when the Federal
Reserve meets next week, analysts believe inflation
is reaching the point where the central bank will signal
that it will increase rates early this summer. The stock
market, anticipating such a move, has already been
spooked in recent days.

"Yes, inflation starting to creep up, but still creeping,"
says David Wyss, chief economist at Standard & Poor's
in New York. "It's time for the Fed to start thinking
about it, but not panicking about it."

Consumer prices have started to pick up in particular
in the past three months. Before that U.S. companies,
facing competition from abroad, had absorbed most
of the price increases.

Now, however, the dollar is weaker and Asian
economies are expanding. "The modest acceleration
of price increases reflects the welcome revival of
pricing power and not the beginning of a problematic
inflation," says Clifford Waldman, an economist for
the Manufacturers Alliance/MAPI in Arlington, Va.

Unlike other inflationary periods, economists say
there are some unusual twists this time. The U.S.
economy is now more attuned to the global economy.
Last year, for example, the prices of imports fell. So
far this year "they are up 2 percent and probably
going higher," says Robert Gay, chief economist at
Commerzbank Securities in New York.

One reason for the higher import prices is rising
inflation in China. The Chinese have become major
buyers around the world of everything from scrap
metal to waste paper. They're now buyers of
one-third of all the aluminum produced in the world.
"They don't have the margins to play with, so they
are passing on their higher commodity prices to their
exports," says Gay.

China may be planning to do something about its
booming economy. On Wednesday, Reuters reported
that Chinese Premier Wen Jiabao, in an interview,
indicated the country may need to slow things down
to moderate inflation. This news dropped the price of
gold, aluminum, and other metals.

Consumers may have noticed the higher prices this
spring when they shopped for new clothes -- most of
which are made in China. At the Village Finery, a
boutique in Shepherdstown, W.Va., prices are up 5
to 8 percent, says Heather Schott, the owner. "Even
the more throwaway types of clothes that you wear
for the backyard barbecue are up in price," says
Schott.

For most consumers, the closest encounter with
inflation comes when they go to the grocery store,
particularly the dairy section. According to the U.S.
Department of Agriculture, butter has gone from
$2.84 cents per pound to $3.46. Milk is actually
down from the beginning of the year. But it will
probably go up soon, since wholesale prices are
slated to rise 50 cents a gallon in May.

Behind the rise in dairy products is a 1.8 percent
reduction in the nation's cow population. Dairy
farmers, with the lowest prices in history in 2002,
started reducing their herd sizes when beef prices
started rising. At the same time, the United States,
concerned about mad cow disease, cut off imports
of dairy cows from Canada.

"It's typical of an inelastic product -- small changes
have a greater impact on price," says Mary Keough
Ledman, a dairy economist in Libertyville, Ill.

It could be worse. Many businesses are absorbing the
price hikes in order to keep their customers. Take Il
Forno, a restaurant on Manhattan's Upper West Side.
Joe and Mike Chaghlil sell ham and egg sandwiches
for $2.50. They used to make good money on them.
But in the past year the price of the eggs went from
$20 a case to $40, while the price of ham climbed
from 42 cents a pound to 56. Even the bread became
more expensive.

"We're probably losing money on each sandwich,"
says Joe Chaghlil, who has not taken a salary in eight
months to help keep the restaurant in business. "But
the customers won't pay more."

Yet other stores are starting to pass on part of their
higher costs. That's the case at Schaller & Weber, a
deli on Manhattan's Upper East Side. "The chickens
have gone up like crazy, the pork prices are going up,
the bacon -- bacon is through the roof now," says
Chris Cunningham, the manager who notes the store
passes on about 75 percent of the the higher costs to
consumers.

One place where higher prices have become evident
-- quickly -- is a Papaya King on the East Side. The
store, which sells about 1,500 hot dogs a day, has
increased prices four times in the past 14 months.

Next up: higher prices for the soft drinks. "We have
to stay competitive within the fast-food price range,"
says Alexander Poulos, the general manager.

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