Econ Edge: The Economic Week
April 18, 2005 — -- Gasoline prices continue to reach record levels and Americans are spending even more at the pump. That leaves us with less money in our pockets to do the thing that has been driving the U.S. economy, SHOPPING AND SPENDING! There's also the concern that high energy prices could be passed along to consumers in the form of higher prices, the dreaded "inflation."
This week, two economic indicators will tell us if inflation could be around the corner: the Consumer Price Index -- what consumers pay at the retail level -- and the Producer Price Index -- the cost of goods at the wholesale level. To help us sort through all of this, we contacted Benjamin Tal, senior economist with CIBC World Markets to give EconEdge his perspective.
ABC: What are your forecast for the Producer Price Index and the Consumer Price Index this week? Why?
Tal: CIBC World Markets expects the Producer Price Index to rise by 0.6 percent (month over month) in March, but it would be all energy-related. The core (which excludes food and energy costs) PPI is expected to rise by only 0.2 percent. Same goes for the CPI, where once again energy prices will steal the show, driving a 0.6 percent increase in March. With the retail price for gasoline topping $2 per gallon, it has been a painful month for drivers.
At the same time, core CPI should get some relief after February's 0.3 percent increase, taking the yearly rate down a tick to 2.3 percent. With the high toll energy prices are taking on consumers, retailers could be forced to pile on discounts in order to lure shoppers back to their stores, like we saw last summer, helping throw cold water on core inflation's recent acceleration.
ABC: The big worry now seems to be inflation. Last week, the Federal Reserve released the minutes of its meeting in March when it increased interest rates and there appeared to be growing concern among the members about inflation. Are we at the verge of a big increase in inflation? What does this mean to consumers?
Tal: While the headline inflation number is rising due to higher energy prices, the core inflation rate (which excludes energy and food) is just over 2 percent. The later is the rate that the Fed focuses on. And even the Fed admits that, as opposed to previous oil shocks, higher oil prices were not able to lift core inflation in any significant way. The question is why. The short answer is that this time around companies have very little pricing power and are not able to transfer the increased cost to consumers. Intense competition due to the globalization and the Walmartization of the North American economy limits the ability of U.S. companies to increase prices, and thus keeps inflation at bay. Accordingly, CIBC World Markets doubts that the current inflation worries will materialize. What was normal in the past is not normal in the context of today's economy.
ABC: The other big worry is oil. While crude oil prices have been sliding from their recent record highs, what do you believe will be the impact of these high oil prices on the U.S. economy in general and on the American consumer specifically?
Tal: The real story about oil price is not that they are elevated now. The real story is that they will be elevated six and 12 months from now. As opposed to the situation in 1973, 1979 and 1991, the current surge in energy prices reflects a fundamental gap between growing demand for energy and limited supply. The impact on the U.S. consumer is obvious with increased gasoline costs taxing away half of American's pay increase over the past year. And given that in the short run (two to three years) U.S. households' demand for energy is not very elastic, consumers have no choice but to continue to absorb the increased cost, and the resulting reduced spending on other goods and services. Just look at March's disappointing retail sales to get a sense of what's coming.
THIS WEEK'S ECONOMIC NEWS CALENDAR
Some information compiled from wire services.
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