What to Make of the Latest Inflation Numbers

  • Share
  • Read Later
Soaring gas prices, fighting in the Middle East—we've seen this movie before, and it was called the 1970s. But despite the warning signs out there, don't expect a return to 1970s-style inflation. As long-term interest rates rise, it should cool the economy's bubble-spot, real estate, which will cause consumers to rein in their spending and prevent companies from raising prices too much. Meanwhile, as gas and oil production recover from the Gulf Coast hurricanes, fuel prices should stabilize or even fall.

Still, there's plenty of bad news to go around. The soaring cost of energy has begun to ripple through the economy, signaling a near-certain end to the glory days of zero-percent car loans and 5.5% fixed-rate mortgages. Some deals are still out there: Ford is desperately trying to unload a backlog of gas-guzzling SUVs with interest-free loans, and long-term rates haven't moved up all that much yet. You can still refinance into a 30-year fixed-rate mortgage for less than 6%. If you're in the market for a truck or a refi, get to it. These deals will be fleeting by next year.

The sharp run-up in energy prices is "an accident waiting to happen," Federal Reserve Chairman Alan Greenspan said Monday. That's not the sound of a central banker about to start sitting on his thumbs. The Fed has been raising short-term rates for a couple years—from a fed funds rate of 1% to 3.75%. Economists expect him to keep boosting the benchmark rate to about 4.5% next year.

Surging consumer and wholesale prices give him plenty of cover. Both measures showed their sharpest gains in more than a decade in September. And the Fed is sending out strong signals that it is concerned. Richard Fisher, the president of Federal Reserve Bank of Dallas, has warned that inflation is near the "upper end" of the Fed's target range. William Poole, president of the St. Louis Fed, has said he had no doubt that the Fed "would respond to surprises in core inflation that seemed likely to be persistent."

Things don't look so desperate when you strip out volatile fuel prices. The core consumer rate has risen just 2% the past 12 months, even though overall consumer prices have jumped a more troublesome 4.7% in that period. The big fear is that the core rate will lift as companies raise prices to offset the higher prices they pay for energy. "Inevitably, we'll get some pass-through," says James O'Sullivan, economist at the brokerage UBS. Indeed, Clorox, Marriott, Carnival, Deere and FedEx have already raised or said they would raise prices because of the high cost of fuel.