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Inflation explodes in manufacturers' prices -- but not gold and silver

Section: Daily Dispatches

Spectre of Inflation Over Global Economy

By Francesco Guerrera, Krishna Guha, and Javier Blas
Financial Times, London
Tuesday, June 24, 2008

The spectre of inflation returned to haunt the global economy on Tuesday as companies ranging from Dow Chemical of the United States to South Korea's Posco unveiled sharp price rises to combat the soaring cost of energy and raw materials.

The moves by Dow, the biggest chemical group in the US, and Posco, the world's fourth largest steelmaker, came as Charles Holliday, chief executive of the chemical giant DuPont, warned of rising inflationary pressures in the corporate sector.

"Inflation is here big-time," Mr Holliday told the Financial Times, adding that companies such as DuPont faced "tremendous cost pressures" and had the "obligation" to raise their prices to offset higher costs.

The general price pressure was exacerbated when BHP Billiton, the mining company, said the 96.5 per cent record increase in iron ore cost announced by Rio Tinto on Monday was not enough, signalling it could ask for a rise above 100 per cent with its steelmaker customers.

The sustained rise in the price of oil and commodities has hammered industries such as airlines and carmakers and deepened fears of a global inflationary spiral -- which has already provoked riots across Asia -- as producers pass on higher costs to manufacturers and consumers.

Figures on Tuesday showed US consumer confidence fell to a 16-year low in June while inflation expectations held at their recent record high. A closely watched housing index showed house prices in 20 of the biggest US cities posting a record 15.3 per cent year-on-year decline in April.

Inflation pressures will be high on the agenda at the two-day interest rate-setting meeting of the Federal Reserve, which concludes on Wednesday. The Fed statement is likely to indicate increased concern about inflation, despite a slowdown in the US economy, while avoiding any signal that rate increases are imminent.

Rising inflation would compound the crisis of the US consumer, whose confidence has been decimated by the bursting of the housing bubble and the ensuing financial turmoil.

But US macroeconomic data have so far shown little evidence that higher commodity prices have been passed to consumers.

Above-normal price increases have tended to be confined to industries for which commodity prices make up a large part of total costs, such as chemicals and airlines. The Fed is hoping that companies in most sectors will end up absorbing cost increases in their profit margins, which are above historic norms.

Andrew Liveris, Dow's chief executive, said the decision to raise prices on the company's products by up to 25 per cent -- the biggest hike in company history -- were aimed at offsetting a "staggering" increase in costs.

Dow is expected to spend $32 billion on energy and oil-based raw materials this year, more than four times the amount it spent in 2002, the company said.

Posco said it was increasing prices by up to 21 per cent, taking the cumulative price inflation to about 60 per cent. German steelmaker Salzgitter also said it would raise prices by 20 per cent.

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