Excluding everything, there is no inflation at all
Tue Aug 16, 2005 2:16 PM ET
By Pedro Nicolaci da Costa
today.reuters.com.
NEW YORK (Reuters) - Americans who avoided driving, eating, drinking and smoking in July experienced no inflation whatsoever. Unfortunately, everyone else felt a serious pinch.
As oil prices hit new records on a weekly basis, some economists are starting to question the wisdom of stripping out energy costs from inflation data to get a reliable reading of underlying price trends.
"Economists like to throw out energy, but the question is, why X it out when it is not temporary," said Michael Englund, chief economist at Action Economics in Boulder, Colorado.
Analysts and policy-makers have long relied on "core inflation," which excludes food and energy costs because of their tendency to fluctuate abruptly, to get a sense of how quickly higher prices are filtering through the economy.
But the latest report on consumer prices highlights the gap between what core prices suggest and the reality faced by a majority of consumers.
Core consumer prices rose only 0.1 percent in July, bringing annual core inflation to 2.1 percent, the U.S. Labor Department reported on Tuesday. By contrast, overall inflation raced 0.5 percent higher as surging energy costs took their toll, bringing the broader inflation trend to 3.2 percent on an annual basis.
Crude oil prices have soared to new heights in recent months, reaching a new all-time high of around $67 a barrel for immediate delivery on the New York Mercantile Exchange on Friday.
Optimists both on Wall Street and in Washington have long argued that the effect from higher crude prices would be temporary and would eventually subside.
But it seems that every time someone makes that claim, oil prices spike even higher.
SOMETHING'S GOT TO GIVE
At the start of 2005, the consensus among market economists was that the U.S. economy could not withstand oil prices above $50 a barrel for a sustained period. Not only has that level been maintained, it has actually been surpassed for four months.
The energy price shock has many observers arguing that something has to change. Ebullient U.S. consumer spending is a prominent candidate.
"A few weeks ago, we learned that hourly wages of blue collar, non-managerial workers, rose 0.4 percent in July, the fastest monthly growth rate in a year," said Jared Bernstein, senior economist at the Economic Policy Institute.
"Today we learned that inflation gobbled up that increase and more, causing both the real hourly and weekly wage to fall slightly in July," he added.
Signs that the spending binge of the past two years cannot be sustained are already emerging.
U.S. housing starts appear to have peaked just above 2 million annualized units per month, and now look to be edging lower.
Meanwhile, retail heavyweight Wal-Mart Stores Inc. <WMT.N> on Tuesday warned of a weaker third quarter as steep oil prices hurt consumer spending, casting a pall over the entire sector and sending retail stocks lower.
Making matters worse, retail gasoline prices soared to a record national average of $2.55 a gallon in the latest week and will likely rise through early September as high crude oil prices are passed on to motorists.
"The moral of the story is that after driving the brand new car off the dealer lot and filling it up on the way to the mall, the consumer quickly realized that there was no change left to go on a fashion buzz," said David Rosenberg, chief North American economist at Merrill Lynch. |
