NOTHING COSTS MORE...:

What's Taking the Air Out of Inflation: Soaring energy and food costs are pushing up overall inflation. But they're leaving consumers so strapped that businesses lack pricing power (James Cooper, 5/21/08, Business Week)

The point here is that households may expect energy and food to push overall inflation higher, yet consumers' expectations cannot generate a '70s-style inflation psychology because spending on those two items requires so much sacrifice elsewhere. Last quarter, consumer spending outside of energy and food was the weakest in 13 years. This broad slump in demand is cutting deeply into business sales and profits, forcing cost cutting. Unlike the 1970s, wages and prices cannot push each other higher, so inflation remains confined to energy and food.

Even after three years of rapid price growth in energy and food, core inflation—which excludes those two items—is no higher than a year ago and remains below where it was two years ago. In the past three months core inflation has slowed sharply, rising at only a 1.2% annual rate, suggesting weaker demand is already having some impact.

The squeeze on demand will get worse.

A glitch in a discrete segment of the market--even one as important as gasoline--does not inflation make. And glitches correct.

Posted by Orrin Judd at May 24, 2008 9:28 AM