Economic Growth Spurs Concerns Over Inflation

Higher than expected economic growth also means heightened concern about inflation. And inflation was a pretty big worry even before the Commerce Department's announcement Thursday that second-quarter gross domestic product increased at the surprisingly robust annual rate of 3.3 percent.

Consumer prices were up more than 5 percent in July compared to a year before; that's the biggest jump in nearly 20 years. Wholesale prices are rising even faster, and that's not a good thing.

President Ronald Reagan once called inflation "as violent as a mugger, as frightening as an armed robber and as deadly as a hit man." That may be a bit dramatic, but inflation can cause a lot of pain for working families, as prices rise faster than wages can keep up. Banks also respond by raising interest rates, which makes home loans and all other forms of credit more expensive.

A lot of countries in the developing world recently have seen tremendous economic growth. That created strong demand for things like steel and oil, and pushed up prices. For a while, U.S. companies tried to make up the difference by becoming more productive and efficient. But more firms are now trying to pass the higher costs along to customers. Part of that has to do with the weak dollar, because it raises the prices of goods from foreign competitors. That gives U.S. companies some room to raise prices.

Economists are split over what all this means. Some think the economy and the American consumer are facing enough head winds to keep inflation in check. With more people losing their jobs, working fewer hours or less overtime, they have less money in their pockets to spend.

The downturn in the housing market also hurts consumers' willingness to spend. Add to that the fact that energy prices are falling again, and some economists say inflation must subside. That seems to be the attitude at the Federal Reserve as well: It hasn't yet begun raising interest rates to fight inflation.

But other economists disagree. They think the strong GDP numbers show that the economy really hasn't slowed down enough yet to curb inflation. Dean Maki, chief U.S. economist at Barclays Capital, says "the overall inflation picture remains quite worrisome" and is now at a "tipping point." He notes that 20 percent of small businesses now cite inflation as their No. 1 concern. That hasn't happened since the early 1980s.

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