High prices spread throughout economy
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KAI RYSSDAL: Every time inflation statistics come out from the Department of Labor, and that happens once a month, we actually get two numbers. The first is a reflection of all the prices the government measures: housing, food, cars, the whole deal. The other’s what’s called the “core rate.” That’s the one economists pay the most attention to, because it leaves out food and energy. Yes, we all eat and use electricity, but those prices change so much they’re not really useful as a way to measure inflation trends. Anyway, today we learned the overall consumer price index was up .4 percent in January, and worse, that the core rate was just .1 percent lower, which means higher prices are spreading into the broader economy.
We asked our Washington bureau chief John Dimsdale how come.
JOHN DIMSDALE: Like many of our manufactured goods these days, a lot of our inflation is imported. Higher labor costs in countries like China, along with rising demand for raw materials, are making traditionally cheap items like clothing, more expensive for the first time in more than a decade. Economist Joel Naroff at Commerce Bancorp says as the dollar fell importers had to pay more for goods manufactured overseas.
JOEL NAROFF: Foreign producers had been doing their best to hold out and not raise prices in the U.S., but now we’re beginning to see that they’re doing that, and that’s why there’s more concern now than there had been about inflation.
On the domestic side, a jump in health care costs contributed to January’s spike in core inflation. With the annual rate running at 2.5 percent, the Federal Reserve Board is in a tough spot. To ease the credit crunch, the Fed wants to lower interest rates, but that puts more money in the economy, stoking inflation. The Fed is counting on a slowing economy to ease inflationary pressures, and Dean Baker, at the Center for Economic and Policy Research, says that could happen.
DEAN BAKER: But people shouldn’t get that happy about it, because the main way in which a weaker economy is going to slow inflation is by weakening wage growth. You know, we might see somewhat lower inflation if, you know, we see the unemployment rate rise and wages grow less rapidly, but, you know, the other side of that story is that most of us are going to see our income grow less rapidly as well.
For now, Baker says recession, not inflation, remains the bigger threat to the U.S. economy.
In Washington, I’m John Dimsdale for Marketplace.
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