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Higher than expected growth also means heightened concern about inflation. Inflation was a pretty big worry even before these latest numbers. Consumer prices were up more than five percent in July compared to a year ago; it's the biggest jump in nearly 20 years.
President Reagan once said inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man. NPR's Chris Arnold explains.
CHRIS ARNOLD: This would be a good sound for a videogame about that deadly hit man. You could call it Inflation Hit Man 2000.
(SOUNDBITE OF MACHINE)
ARNOLD: But it's actually coming from a high-tech sheet-metal-cutting machine on the factory floor at a company called Metal Works in New Hampshire. Fred Pierce is the CEO.
It sounds like some kind of machine gun or something.
FRED PIERCE: Yeah, well, what we're doing is we're punching out different shapes on a flat piece of steel. So we can create any shaped part that someone designs.
ARNOLD: The company makes parts for medical X-ray equipments and all kinds of other stuff, but Metal Works has been getting hurt by rising costs of raw materials.
PIERCE: Steel, aluminum, stainless steel, copper, all those prices have gone up dramatically in the last really eight months. So, since January, the price of steel is up, I don't know, between 70 and 80 percent, not something that we can absorb.
ARNOLD: What's been happening is that a lot of developing countries' economies have been growing like crazy, and that's created strong demand for things like steel and oil. For a while, U.S. companies tried to make up the difference by becoming more productive and efficient, but more are now trying to pass the higher costs along to customers.
Dean Maki is chief U.S. economist at Barclay's Capital.
DEAN MAKI: I think there are a lot of reasons to be concerned about the inflation outlook. It seems that we've reached a sort of tipping point.
ARNOLD: Maki says the weak dollar has been forcing foreign competitors to raise prices here in the U.S., and that makes it easier for companies here to pass along at least some of the higher costs that are squeezing them.
MAKI: Twenty percent of small businesses say inflation is their single biggest problem at this point. We haven't seen those kind of numbers since the early 1980s, and they are responding by raising prices. We think the overall inflation picture continues to be quite worrisome.
ARNOLD: Back at the Metal Works factory, Fred Pierce is raising his prices too.
PIERCE: We're trying to raise ours between five and seven percent.
ARNOLD: Around the country, that's about how much consumer prices have risen over the past year. Wholesale prices are up nearly 10 percent. That's a big jump. But Fred Pierce also says his sales are down 20 percent. Competition from abroad is still tough, and that definitely stops U.S. companies from raising their prices as much as they'd like to.
PIERCE: Yeah, absolutely. We had - we lost two big projects in the last year, one that went to China and one that went to Mexico.
ARNOLD: So I guess that's a clear signal you can't raise prices that much or you're going to lose business.
PIERCE: That's exactly right, yeah.
ARNOLD: So Pierce says he can't afford to offer much in the way of wage increases right now. Eric Dupont(ph) is one of the workers here who runs the big metal-punching machines.
ERIC DUPONT: Right. I'm just very happy I have a job right now, especially with the work load decreasing because all the economy and stuff like that. Yeah, it's making it real tough for us lower-level guys to live.
ARNOLD: Metal Works has cut back overtime hours, so Dupont's making less money and paying more for gas and food. He commutes 50 miles each way. He says he and his fiance are trying to save up for their wedding, and they're cutting back on other spending.
DUPONT: We no longer have cable. We don't have a phone at home right now. We have cell phones. So we're trying to get help with day care assistance through the state right now. I don't want to complain about my own home financial situation, but it's really tough.
ARNOLD: If enough consumers cut back on spending, it'll be difficult for inflation to race ahead the way that it's been doing recently. Energy and commodity prices have started to fall back down a bit. Alan Blinder is an economist at Princeton who sees the glass half-full here.
ALAN BLINDER: And it is almost perfectly predictable. Something very strange would have to happen for this not to be true, that inflation will fall dramatically.
ARNOLD: Economist Dean Maki disagrees, and he thinks inflation may fall a bit, but he says the strong GDP numbers out today suggests that the economy isn't yet slowing down enough to really put a damper on inflation. So he's still concerned. Meanwhile, the Federal Reserve will be watching closely, ready to intervene if prices keep rising this quickly. Chris Arnold, NPR News.
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