Politics & Government

How bad will inflation get? Depends on what you buy

WASHINGTON — Consumer inflation rose a modest 0.3 percent in March, but that's still troubling because food and energy prices continue climbing even as many economists think that the U.S. economy is in recession.

The consumer price index showed an annual rate of inflation — the rise in prices across the economy — of 4 percent over the 12 months that ended March 31, according to a report Wednesday by the Bureau of Labor Statistics.

Food prices rose by 4.5 percent over that period and gasoline prices rose by 26 percent.

Here are some answers to questions about inflation at home and abroad:

Q. The economy is slowing, maybe in recession. Shouldn't that cause the inflation rate to fall?

A. Usually, yes. But inflation continues its creep partly because of the surging price of oil, now trading at more than $114 a barrel. And commodities ranging from wheat and rice to copper and other raw materials are in high demand across the globe, sending food prices higher and triggering food riots in Egypt, Haiti and elsewhere.

Q. What about here at home?

A. Wednesday's inflation data show that the price of eggs rose almost 30 percent in the year since March 2007. Bread rose 14.7 percent over 12 months, 2.1 percent in February alone. Fresh whole milk is up 15.2 percent over 12 months, although it's down 2.2 percent from February. Consumers are pinched on staples of their diet.

Q. Will inflation get worse?

A. Most mainstream forecasts expect inflation to taper off as the economy slows. But two members of the Federal Reserve's rate-setting committee voted in February against further interest-rate cuts, fearing that low rates and an economic stimulus package could get the economy growing again, rekindling inflation that never tapered off.

Q. How does oil affect inflation?

A. Oil is the prime driver of inflation today. High oil prices drive up gasoline prices, which in turn drive up the consumer price index, a broad gauge of inflation.

"Retail gasoline prices have risen an additional 11 cents a gallon in the first few weeks of April, to $3.40 a gallon," Mark Vitner, senior economist for Wachovia, said in a note to investors Wednesday. "Eventually, all of this run-up in gasoline prices will be captured in the CPI data, which means we should see much larger (inflation) gains in coming months."

Q. So what's wrong with a little inflation?

A. Expectations of inflation are as important as the inflation rate. When people expect prices to keep rising, businesses raise their prices to compensate, workers demand higher wages and a price-wage spiral ensues. This is the worst nightmare for Fed Chairman Ben Bernanke, an inflation hawk.

Q. Why do oil prices keep rising?

A. The price is being pushed up, in part, by soaring demand in growing economies such as China and Middle East oil-producing nations that are reinvesting their petrodollars in development. Also, oil production is off in major producing countries such as Mexico and Russia. That leaves little margin for error, and oil traders drive up the price on fears that an accident or international incident could result in a global shortage.

The sliding value of the dollar also is driving up oil's price, because producers, whose contracts are in dollars, demand a higher price for oil to compensate for the weakening dollar.

Q. Oil prices soared past $114 a barrel Wednesday. They can't go much higher, right?

A. Oil could climb above $120 a barrel in the months ahead. Israel could attack Iran before ally President Bush leaves office, hurricanes could strike the U.S. Gulf Coast again, rebels could halt production in increasingly important Nigeria or a major U.S. refiner could have an industrial accident. Any of those events would drive up the price.

ON THE WEB

The detailed inflation report.

The shorter version.

Energy Information Administration report Wednesday on gasoline prices.

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