Is inflation still at bay?

Date posted: January 18, 2011

Inflation matters for everyone, from families and businesses trying to pay their bills to government policy makers. N.C. State University economist Mike Walden gives an update on the latest inflation readings.

“At the consumer level … the so-called consumer price index is still running very, very low — very good rates. The … reading we had for November showed the annualized inflation rate running at under 1 percent. This is both for the total rate as well as what economists call the core rate, which takes up all the little components. So an under 1 percent rate is very, very good.

“The biggest concern, however, about inflation is not at the retail level; it is at the input or producer level. The prices of items that businesses have to buy to keep their businesses going those prices have been going up much faster. In fact if you look at raw materials, your metals, your basic inputs, those have been going up at a rate of 12 percent on an annualized basis. And then what are called intermediate input items, they have been going up at an annualized rate of 6 percent.

“So there is not concern about inflation at the retail level. There is at the producer level, and that has led many to worry about, well, aren’t those higher producer prices simply going to be passed on eventually, and you and I are going to see it at the consumer level. Two answers to that: One is there is no necessary one-to-one correspondence between producer inflation and retail inflation. And secondly, even though we see the prices for many of those items — raw materials, intermediate materials — going up very rapidly, still labor costs — labor costs — are the biggest expense for businesses, and labor costs have not been going up very rapidly.”

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