washingtonpost.com  > Business > Special Reports > U.S. Economy

High Energy Costs Ratchet Up Inflation

Feb. Rise May Portend Stronger Fed Action, Some Economists Say

By Nell Henderson
Washington Post Staff Writer
Thursday, March 24, 2005; Page E01

Rising energy costs pushed consumer prices up in February at the fastest rate in four months, the Labor Department reported yesterday, reinforcing concerns that inflation may be poised to take off in a way that would roil the U.S. economy and shake financial markets.

The Federal Reserve has been slowly and steadily raising interest rates since last June to head off inflation threats, but now it may have to act more aggressively, some economists fear. That could upset a delicate balance that has kept consumer spending high and the economy chugging strongly ahead.

Faith Lysogorski, Planterra Corp. floral design assistant, fills a company GMC Savana fuel tank in Farmington Hills, Mich. (Paul Sancya -- AP)

_____Message Boards_____
Post Your Comments

A more abrupt increase in interest rates, combined with higher prices for consumer goods, would create real dangers for the economy. The rate increases would likely drive down stock and bond prices, making businesses more cautious about investing and hiring. At the same time, consumers would have to contend with higher interest costs for their credit cards and home equity loans. Higher interest rates also would likely slow real estate appreciation, dampening consumers' eagerness to borrow against their homes to pay for vacations, new cars and other items.

Prices, meanwhile, are already rising faster than wages for most workers, another government report said yesterday, further sapping their buying power.

"With household savings rates already at their lowest levels since 1933 and debt levels at record highs, yesterday's wage data implies a slowing, perhaps sharply, in consumer spending growth in the months ahead," said Charles W. McMillion, chief economist with MBG Information Services, a Washington advisory firm.

Many economists think the Fed will keep inflation under control without triggering such a severe slowdown.

On Tuesday the Fed raised its benchmark federal funds rate, the overnight rate on loans between banks, to 2.75 percent from 2.5 percent, and indicated that more increases lie ahead. Many economists predict the Fed will continue to raise the rate by a quarter of a percentage point every six to eight weeks through this year, lifting it to at least 4 percent by the end of the year.

The Fed may be able to stick to this steady pace largely because workers' wages are not rising, several economists said. Labor accounts for two-thirds of businesses' costs, while energy and materials account for ever less in an increasingly service-oriented economy.

"Yes, they have a concern, but . . . the absence of wage inflation pressures should reassure Fed officials that the risks of inflation getting out of control remain very low," said William Dudley, chief U.S. economist for Goldman, Sachs & Co.

Still, the latest inflation figures "suggest that the Fed is right to be more concerned," said Paul Ashworth, senior international economist for Capital Economics Ltd., a research firm in London.

CONTINUED    1 2    Next >

© 2005 The Washington Post Company