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Inflation Pressure Building

April 11, 2005
The latest economic data from the U.S. Government does little to reassure consumers, who are already coping with record high gasoline prices. And one private economist says inflationary pressures that appeared at the end of last year are becoming more pronounced.

"While Newton may have concluded that what goes up must come down, we are still waiting for his law of gravity to be proved in the oil market," said Joel Naroff, of Naroff Economic Advisors. "Right now, what goes up must go up even more and that is creating real hardship for many people and businesses. With prices for energy so high for so long, spending is being cut and that is lowering estimates for economic growth."

The sudden and rapid rise in fuel prices, says Naroff, is like a tax. Consumers have less money to spend on other things. Adding to the economic uncertainty, the rise in oil prices is beginning to have a ripple effect through the economy.

"Businesses are also being pressured by rising energy prices and feel they can only swallow so much of it. As a result, they're now beginning to look for ways to raise prices. So the consumer is not only paying more at the pump, but soon will be paying more everywhere," Naroff told ConsumerAffairs.com.

The inflation alarm bells have been ringing at the Federal Reserve for the last couple of months. At its latest meeting, March 22, the Fed's Open Market Committee formally recognized the potential of inflation.

"The Fed's rate setting committee did what was expected: It raised the funds rate one-quarter percent. But in its closely watched statement, it noted that 'pressures on inflation have picked up in recent months and pricing power is more evident,'" Naroff said.

So, while inflation creates a drag on the economy, making consumer goods and services more expensive, it will likely make borrowing money more expensive too. Naroff said he expects interest rates will continue to creep higher, especially long term rates like mortgages.

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