Rising Oil, Dairy Costs Fuel 'Perfect Storm' for Inflation, Wholesale Prices
May 14, 2004 (Chicago Tribune - Knight Ridder/Tribune Business News via COMTEX)
-- Robert Meyn, vice-president of sales and marketing for suburban homebuilder
Ryland Homes, didn't need the government to tell him that commodity prices are
rising.
Ryland has already absorbed soaring costs on everything from lumber to concrete.
So it should come as no surprise that the builder's new houses will cost as much
as 6 percent more in June.
"Prices are going up, and they will continue to go up," Meyn said.
Elizabeth Carter, a chemical engineer from Joliet, said she was surprised that
even a pack of Wrigley's Juicy Fruit gum had gone up a nickel. "Usually it's 25
cents. I was astonished, because that's kind of a large increase."
On Thursday, the Labor Department reported that wholesale prices -- powered by
big increases in fuel and food -- jumped much faster than economists had
expected in April. But signs of inflation seem to be all around us.
The Producer Price Index, which measures prices of goods before they reach
stores, rose by 0.7 percent, the largest monthly increase in a year.
Whether those increases are being passed along to consumers will be more clear
on Friday morning when the government releases the April Consumer Price Index, a
monthly tally of retail level prices.
But it is already evident that more and more companies like Ryland are feeling
the pressure to raise prices. Some are already taking steps to do so.
Economists had expected wholesale prices to rise only 0.3 percent in April. But
a surge in the price of oil to as much as $41 a barrel and a spike in dairy
prices due to an acute shortage of milk sent the index soaring.
Excluding energy and food, which tend to be especially volatile month to month,
wholesale prices rose a much more moderate 0.2 percent, matching market
expectations. But while that provides some comfort, said Paul Kasriel, chief
economist of Northern Trust Corp. in Chicago, rising gasoline and dairy prices
are still alarming.
"Energy is rising because of an increase in global demand," said Kasriel. And
that means inflation.
Steve Nolan, a AAA-Chicago Motor Club spokesman said a gallon of unleaded
gasoline is averaging $2.10 in the Chicago area.
"A month ago it was $1.89," Nolan said. "A year ago it was $1.58."
That kind of increase doesn't immediately ripple through the economy, but it
clearly turns up the heat. Consider the disparate experiences of Joe Napier and
Robert Stranczek.
The jump in prices has been painfully obvious to Napier, who owns Act One Limo,
a Loop-based company that operates eight limousines and buses.
Napier is blunt about his company's strategy for dealing with higher fuel costs.
"We eat it," he said.
He explained that the company would happily raise prices if it could, but
ferocious competition from the many small players in the industry prevent it
from doing so. In any case, he said, business is slower than usual for this time
of year.
"People are cutting back because the inflation affects everybody," Napier said.
Stranczek, on the other hand, has been able to pass the high cost of fuel onto
his customers. With diesel selling for a rich $1.80 a gallon in Illinois, the
president of Harvey-based trucking company Cresco Lines Inc., feels he doesn't
have much choice.
"We have a fuel surcharge in place" to offset higher diesel prices, Stranczek
said. "We are recouping some of it but not all of it." In the meantime, he said,
Cresco's customers, when possible, are passing along the higher transportation
costs to their customers -- an almost textbook example of inflation.
Firms making everything from kitty litter to ice cream were complaining about
higher commodity prices this week.
Daniel Jaffee, president of Oil-Dri Corp of America said the rising costs of
natural gas and various resins has forced price hikes on his cat litter and
industrial absorption products.
"The futures markets are not showing any sign of relief in the months to come,"
Jaffee said.
Rising milk costs are also showing up in consumer prices.
In recent months, a shortage of dairy cows -- and tight supplies of the Monsanto
growth hormone that makes cows produce more milk -- has created a shortage of
milk and milk products. That has put enormous pressure on everyone from ice
cream producers to maker of croissants and muffins.
Mark Vance, marketing director for Oberweis Dairy Inc. in Aurora, said he's been
forced to put through an 8 percent increase on the price of a half-gallon of
milk. Ice cream producers nationwide are also seeing big price hikes, he said.
Panera Bread, which operates bakery-cafes in 35 states, has seen a 90 percent
increase in the price of its butter supplies in the last year, said Neal
Yanofsky, executive vice president. That, combined with increases in the price
of cream cheese, ham, bacon and chicken, have led to price increases of 2
percent overall and 7 percent on "sweet goods" like muffins and cookies.
"It's been a perfect storm on the pricing front," Yanofsky said.
By Michael Oneal and Robert Manor.
Sharon Strangenes and Melissa Allison contributed to this story
To see more of the Chicago Tribune, or to subscribe to the newspaper, go to
chicagotribune.com
(c) 2004, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News.
-0-
*** end of story *** |
