Slow Economy, High Prices Raise Specter of Stagflation

Prices for a wide variety of the materials that businesses buy soared in January, according to a government report, creating new pressure for businesses to raise the prices they charge consumers.

The producer price index, which measures wholesale inflation, rose 1 percent in January -- more than double what economists had forecast. Wholesale prices are up 7.4 percent over the past year, the Labor Department reported, their steepest rise since 1981.

Fuel prices were a major driver of the January increase, but prices also rose rapidly for a broad range of other items that businesses buy: agricultural machinery (up 2 percent from December); transformers and power regulators (3.6 percent); flour (3.3 percent); industrial chemicals (2.4 percent); and nonferrous wire and cable (3.8 percent).

Businesses tend to pass on the increased costs of their wholesale purchases to consumers. Last week, the Labor Department said that consumer prices rose 4.3 percent in the year ended in January.

Together, the two indexes indicate that the rapid price escalation on world commodity markets last year, especially for oil and grains, are rippling through to what both consumers and businesses must pay for an entire shopping cart's worth of merchandise.

Also, the slumping value of the dollar on world currency markets is making imports more expensive. Yesterday, on weak economic news, the dollar fell to an all-time low relative to the euro. A euro cost $1.498, which could eventually make German cars and French wine more expensive for U.S. consumers.

"It's very clear that inflationary momentum not only has not yet ebbed, it's still building," said Kenneth Beauchemin, U.S. economist at consulting firm Global Insight.

There was also evidence yesterday that the economy is slowing. Consumer confidence fell to its lowest level since the beginning of the Iraq war, the Conference Board reported. And home prices nationally fell 8.9 percent in the fourth quarter compared to a year earlier, according to the S&P/Case-Schiller index. Prices fell 9.4 percent in the Washington region.

The national decline was the steepest since economists Karl E. Case and Robert J. Shiller started tracking prices in 1987. The index measures repeat sales of existing single-family homes in the nine divisions defined by the Census Bureau.

As the economy slows and inflation rises, fears are rising that the United States could be facing a period of stagflation, the crippling mix of high inflation and a stagnant economy that was present in the 1970s.

"We're in stagflation, and it's going to get worse," said Peter Schiff, president of Euro Pacific Capital.

Inflation remains well below the double-digit levels of the 1970s, however, as does unemployment, which was 4.9 percent in January.