Inflation concerns rise as Dow Chemical signals 20% boost

Dow Chemical's announcement Wednesday that it would raise prices as much as 20% is just the most recent of a flurry of price hikes by major companies, affecting everything from tissues to coffee to paint.

The big concern: As energy and commodity prices soar, cost increases will seep into areas beyond food and energy, sparking a full-blown episode of inflation.

So far, government statistics say that hasn't happened. Core prices — those minus food and energy — have risen just 2.3% the 12 months ended April, according to the U.S. Department of Labor.

Nevertheless, the inflation that consumers feel the most is much higher. Energy alone has soared 15.9%, and the price of a barrel of light sweet crude oil has skyrocketed 107% to $131.03. Including food and energy, prices are up 3.9%, the government says.

Already, says David Huether, economist for the National Association of Manufacturers, soaring energy prices mean that the average worker's wages have fallen, when adjusted for inflation. "If you exclude energy, real wages would be rising now," Huether says.

Midland, Mich.-based Dow said that its raw materials and energy costs have soared to $32 billion this year from $8 billion in 2002. Those costs soared 42% the past 12 months alone, Dow said.

The higher cost of energy is "putting a strain on the entire value chain and is forcing difficult discussions with customers," Dow CEO Andrew Liveris said in a statement.

Liveris has long advocated revamping U.S. policy to encourage conservation and increase domestic energy production. "For years, Washington has failed to address the issue of rising energy costs and, as a result, the country now faces a true energy crisis," Liveris said.

The biggest price increases from Dow will probably be in polyethylene and polystyrene, says company spokesman Chris Huntley. Those chemicals are widely used in consumer goods, ranging from packaging to fabrics and paints. Although the company has tried to contain costs, "The rise in prices has been so remarkable that our only option is to raise prices," Huntley says.

Rohm and Haas, a Philadelphia-based specialty materials company, told paint manufacturers who buy its product that it would impose energy surcharges of 6% to 10% for chemicals used in paint.

The surcharges, if passed on to consumers, would add 10 to 20 cents to a gallon of paint, says Luis Fernandez, business director for the company's paint and coating materials division.

The surcharge is likely to rise next month because it's indexed to the price of raw materials, he said.

"When I have explained the situation to most customers, they understand — it's a difficult discussion, but most customers understand," Fernandez says.