No Long-Term Threat Seen in Soaring Consumer Prices By SHELLY GARCIA Senior Reporter So far in 2004 gas is hovering around $2.40 a gallon; the price of milk has jumped to four bucks a gallon, and you could probably feed a small third world country for what it costs to buy a pound of beef. Surging food and gas prices have spiked the consumer price index to the tune of 0.6 percent in May. And while that increase has Wall Street spooked, it has hardly registered with economists, or for that matter, area business owners. “I think we all think it’s a temporary kind of thing,” said Ellis Herz, owner of Maxson’s Drugs in Sherman Oaks. “If I had a trucking business or something directly affected by it (it might be different), but our delivery service is not that much as far as how it affects my business. So we kind of go on with business as usual and don’t pay too much attention to it.” For business operators, the rising cost of workers’ comp and health insurance have the potential to do far more damage. And while businesses, as well as consumers, have felt the pinch of soaring gas prices, the increases appear to have subsided in recent weeks, and many believe gas prices are on their way down. The rising cost of food too is seen as a temporary aberration, even by those who operate groceries. “The only thing that’s going to affect whether this goes into an inflationery spiral is the material that makes the food go,” said Pat McQuaid, the owner of Jim’s Fallbrook Market in Woodland Hills, referring to expenses such as transportation and the kinds of disasters that shut down growers, like a freeze or a drought. “All this stuff goes up and down, but the moment something gets extremely popular, everyone wants to grow it as quickly as they can.” Consumer prices soar All told the consumer price index in May rose 0.6 percent in May, the highest spike in years, and many food items have topped the list of price increases in recent months. Butter and margarine was up a whopping 47.2 percent in April compared to December, 2003, according to a recent report at MSN Money based on Bureau of Labor Statistics data. The price of apples rose 16.6 percent; eggs jumped 8.7 percent and cheese and related products were up by 8.1 percent. The beef price index rose 2.8 percent in April and another 1.6 percent in May compared to the same periods last year, the department data revealed. And the price index for pork and poultry rose 2.0 percent and 2.6 percent respectively in May. Food was not the only category rocketing the CPI skyward. Besides gas, which increased 58.1 percent, airline fares rose 13 percent, audio discs and tapes increased 11.5 percent and boy’s apparel rose by 10.5 percent, according to the MSN report. The price hikes sent the Dow Jones Industrial Average and Nasdaq Composite Index into a tailspin early last week. On June 14, the Dow closed down 75.37 points or 0.7 percent at 10,334.73 and Nasdaq plummeted 29.88 points or 1.5 percent to 1,969.99. There was little improvement as the week wore on and by Thursday, the Dow stood at 10,377.52 and Nasdaq was at 1,983.67. But Wall Street’s reaction was a measure of investor’s displeasure at the prospect that the Fed will likely raise interest rates when it meets later this month. Higher interest rates raise the cost of borrowing and eat into profit margins. But even with the projected Fed rate hikes interest rates are still at their lowest levels in years and not likely to have a long term effect on economic growth. Stocks will rebound Even the Street’s pessimism, economists say, is temporary. “Once they raise rates you may see the market rally,” said Mark Schneipp, director of the California Economic Forecast, a research and consulting group. “I look for the market to rally and treasury bond yields to go down. They’ve already run up significantly in anticipation so once they announce (the rate increases) they will probably fall.” Schniepp notes that stock prices represent future expectations. And while a rise in interest rates is generally considered bad for business, the increase anticipated, one-quarter or perhaps one-half of one percent, would not be enough to stymie business activity. Besides, economists argue, the recent run up in consumer goods does not indicate that an inflationary spiral is close at hand. When gas and food is taken out of the equation, the core inflation index rose by only two-tenths of a percent. The price of a number of consumer items, including fresh fruits and vegetables, mortgage rates and the price of cars, has dropped significantly in recent months. And consumers typically substitute other food items for those that become more expensive. At the same time, food prices are expected to slide back down as soon as production falls back in line with demand. “Generally the way the food business works, if you have a great demand for something other people start to grow it,” said McQuaid. “Beef is at an all time high, everyone who owns a cow is growing them as fast as they can. All the beef will show up on the market, and the price will go down again.” The price of gas has had a greater impact, particularly on small businesses that rely on transportation. “Anytime that there’s any kind of rise in prices, it definitely does affect our business,” said Sarah McCullough, office manager at World’s Greatest T-Shirts & Promotional Stuff, a tee-shirt silk screening and marketing company in Tarzana. “Even if it’s for a couple of weeks, it definitely does affect everybody.” But experts say the price of gas is expected to fall, and the effects of the hikes are short term. Schniepp pointed out that already, oil has declined to $37 a barrel last week from a peak of $42 a barrel in May, and, with oil producers once again beginning to increase production, the price should go back down to $27 or $28 a barrel in the long term. “If you look closer at the numbers, the core rate of inflation was low,” Schniepp said. “That core rate is very, very contained, so as an economist, inflation is not an issue.”
