STEVE INSKEEP, host:
If you've been gasoline or food or even a house, you may have an idea what your personal inflation rate looks like. A lot of people, it's going up. Some people, it may be going down.
This week, we're going to find out what the government says consumer prices are doing, and we're going to talk about this with David Wessel. He's economics editor of the Wall Street Journal and a regular guest on this program.
David, good morning once again.
Mr. DAVID WESSEL (Economics Editor, Wall Street Journal): Good morning.
INSKEEP: What are you expecting to see?
Mr. WESSEL: Well, based on what economists are forecasting, the government's likely to tell us this week that consumer prices rose about 4 percent over last year when they released the numbers on Wednesday, largely because food and energy prices are going up so much.
If you exclude food and energy - and of course none of us can do that - the other prices are up about 2.4 percent from last year.
INSKEEP: And why is that difference important?
Mr. WESSEL: The Federal Reserve and some economists like to look at the underlying inflation rate, the part that the Fed has some control over. And they generally exclude food and energy. People always have a hard time understanding that. The consumer price index basket is about one-quarter food and energy prices. And of course, it's huge in people's lives.
One of the interesting things now is that the Fed is more worried about food and energy prices spilling over to other prices. So they're actually looking at the total a lot more than they traditionally did.
INSKEEP: Well, let's figure out the significance of this. Are you saying that this overall index is important, and the way the Fed uses it is important because this will tell them whether they can get away with another interest rate cut or whether they've gone so far that they can't go further without causing higher inflation?
Mr. WESSEL: Right. This is one of the gauges on their dashboard, and they're looking at it and they're worried because it's moving a little bit higher than they would like.
INSKEEP: Two-point-four percent is still not very good?
Mr. WESSEL: Well, it depends what your comparison is. You know, compared to the stagflation, where we had high inflation and high unemployment simultaneously in the '70s, it's still pretty low. But for a long time, about a decade, inflation has not been an issue in the U.S. And the fact that it's beginning to creep up is of great concern to the Fed because they don't want to let it get out of hand.
INSKEEP: And I suppose we should mention that even this 4 percent figure that you mentioned - if you include food and energy prices - I guess that means that the average American, if he doesn't get a pay raise, it's like he just got a 4 percent pay cut over the last year.
Mr. WESSEL: I don't think anybody's worried about this particular pace. It's the direction that's of concern, that for the first time in some years the trend seems to be up. And that's happening even at a moment when the economy is slowing down. And that usually brings down inflation.
INSKEEP: So what would be causing a slowing economy at the same time that inflation would be going up?
Mr. WESSEL: Most of them have to do with what's going abroad. For a long time, we seemed to be importing deflation from places like China, where they...
INSKEEP: Meaning we can get cheaper and cheaper goods from overseas?
Mr. WESSEL: Right. Right. And that's changed. The prices of imported goods from China has started to go up, and, of course, people in India and China want to drive and eat, too. And that's putting upward pressure on food and energy prices at a time when the U.S. economy is slowing down. And that's an unusual combination.
INSKEEP: Oh, well now, let's talk about the implications of that, because for years, Wal-Mart - the biggest U.S. retailer - was telling its suppliers we want something 5 percent cheaper than we bought it from you last year. And next year, we're going to want it 5 percent cheaper again and 5 percent cheaper again. And the way that suppliers were doing that was by sending their manufacturing to China. Are you saying they're not going to be able to do that anymore?
Mr. WESSEL: No. I'm saying they're not going to be able to get it as cheap and make as much money doing that as before.
For a long time, what happened was there were a lot of workers who came onto the world labor market from Eastern Europe and China and places like that, and that depressed prices. Now those people are starting to turn into consumers, and they're buying stuff and that's pushing up prices. In China, for instance, the inflation rate is now 8.5 percent.
INSKEEP: So just as there's increasing demand for fuel, energy around the world, there's increasing demand for every other consumer good?
Mr. WESSEL: Absolutely. And the commodities that go into them.
INSKEEP: David Wessel of the Wall Street Journal. Thanks very much.
Mr. WESSEL: A pleasure.
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