The Marketplace Report: Jump in Price Index
ALEX CHADWICK, host:
Back now with DAY TO DAY. I'm Alex Chadwick.
The Labor Department reports wholesale prices in this country jumped 1.9 percent in September; that is the biggest increase in 15 years. Is inflation back? Here to help us figure that out is John Dimsdale from "Marketplace's" Washington bureau.
John, welcome back. And let me guess: gas prices.
JOHN DIMSDALE reporting:
You've got it. We're seeing how oil seeps through this whole economy. It's such a vital part of transportation, electricity, heat, chemicals. We feel it in so many ways, and energy prices at the wholesale level soared a whopping 7 percent in September. Now amazingly, the core inflation rate--that's when you take out volatile food and fuel prices--was only 3/10ths of a percent.
CHADWICK: So why is that? Energy prices jumped so much, but core inflation remains restrained.
DIMSDALE: There are several things going on. One is the effect of global competition. If you're competing against an Asian supplier, you can't pass along those price increases to your customers. Second, American consumers are shifting their buying habits. They're buying less. You know, the back-to-school clothing sales moved from more upscale department stores to discounters earlier this fall. The chief economist at Mesirow Financial, Diane Swonk, says middle-income consumers these days are willing to shop around to get a bigger bang for their buck.
Ms. DIANE SWONK (Mesirow Financial): They're buying, for instance, prepared foods at grocery stores instead of going to The Limited Service, Boston Markets, McDonald's and, you know, fast-food kind of providers. They're willing to walk into a supermarket that may have slightly less-expensive prices, but prepared foods now have become a big profit margin item for those grocery stores. We're seeing lots of shifts in consumer behaviors so that their living standard isn't dramatically compromised.
CHADWICK: So when wholesalers cannot pass along their increases to consumers, John, what happens to the company then?
DIMSDALE: Well, you know, they don't get back their extra added costs, but--so it has--the first thing it does is cuts into profits. Generally, right now, in this economy, profits are fairly strong, so many companies can absorb the increased costs for a while. To protect their profits, companies have now an incentive to look for productivity gains. They're trying to produce their goods and services more efficiently. And as Diane Swonk points out, the economy has some built-in self-correcting measures.
Ms. SWONK: The higher energy prices have finally triggered behavioral changes, which over time will actually bring energy prices back down. In fact, investment in energy-saving technologies has surged in recent months. And over time, that'll help to correct some of these persistently high and rising energy prices and help to alleviate the pressure on the Fed.
CHADWICK: The Fed--she means the Federal Reserve Board.
DIMSDALE: Right. Right, the famous guardians against inflation. And these higher prices are going to keep pressure on the Federal Reserve to keep raising short-term interest rates to prevent inflation from spiraling out of control. Most analysts expect the Fed to continue doing that for the next few months given today's inflation numbers.
Coming up later today on "Marketplace," a conversation with one of the founders of the mutual fund business, who says the industry has gone down the wrong path.
CHADWICK: Thank you, John.
John Dimsdale of public radio's daily business show "Marketplace," produced by American Public Media.