Tuesday, October 18, 2005

Inflation Adds to Winter Woes

Inflation rose by the highest rate in the past 15 years, largely in part to the surge in oil prices. (AP: Inflation Soars on Surge in Energy Prices). While the nation, still reeling from gas prices approaching $3.00 per gallon, braces for record high winter heating bills, inflation has moved to the forefront of economic concerns. Consumer prices rose by 1.7% in September, while fuel costs soared a whopping 17.9% in the same period.

The core rate of inflation only rose 0.1%, however that figure effectively factors out the most volatile sectors including energy. Given the impact energy costs have on all aspects of the economy from manufacturing to distribution, the rate is certain to surge through the winter. Higher energy costs are already effecting the airline industry and will quickly make its way through all aspects of transportation.

Analysts predict the effects of oil prices, coupled with the Gulf Coast hurricanes will shave at least a percentage point off economic growth over the next six months. How corporations react to the economic slowdown, rising energy costs, and rising interest rates remains to be seen. There are traditionally two ways corporations counter such effects, both of which are bad news for the consumer. Part of the overhead will undoubtedly be passed along in the form of higher prices. Corporate cost cutting will also certainly follow, however, typically through wage freezes, hiring freezes, and in extreme cases, layoffs.

Conditions are ripe for a repeat of a phenomenon last seen in the late 1970s and early '80s. Rising energy costs and rising interest rates in that period resulted in double digit inflation and double digit unemployment. Interest rates reached as high as 17% at their peak. Energy prices are rising at about the same rate now as they were in the late '70s, raising the same concerns.

There are two actions needed to stem the bleeding. First, FOMC must halt their steady interest rate hikes. Traditionally used to halt rising inflation, they are counter productive in our current economic environment and will put further strains on both consumers and corporations alike. Second, the Bush administration must focus on a realistic short-term energy strategy designed not only to halting the increase in oil prices but also aimed at bringing those prices back down to a reasonable figure. Part of that strategy includes conservation, part involves increasing oil supplies, and part must include alternative sources available with today's technology.

What we need is a complete reversal of what we have today. FOMC must drop their hands-on approach and become a passive observer whereas the Bush administration must become an active participant instead of a spectator. Failure to act now will have economic repercussions that will last well into the next decade. History has taught us that, if only we would take the time to learn that lesson.


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