A closely watched inflation gauge reached its fastest pace in 11 years in May, triggering concerns that the Federal Reserve may raise interest rates at least once or twice more before loosening the economic reins.
The Labor Department’s Consumer Price Index posted a 0.4 percent increase in May. Core inflation, which excludes energy and food prices, rose by a larger- than-expected 0.3 percent, with an annualized rate of 3.8 percent over the past three months, the most rapid pace since 1995.
Some economists fear encroaching “stagflation” – an unusual and harmful economic condition in which economic growth slows but prices continue to rise.
From commodities as diverse as beverage cans in China to diesel fuel at an Interstate 70 truck stop, growing inflation is putting pressure on Colorado businesses.
Broomfield-based Ball Corp., one of the world’s largest can makers, is struggling with higher costs for aluminum, steel and plastic resin. Yet the company is finding it difficult to pass those costs on to some customers.
“Our challenge – the challenge for most manufacturers – is to manage these rising costs after spending a decade or more in an environment where there was very little inflation,” said Ball spokesman Scott McCarty. “Right now, this change is rippling up and down the supply chain.”
While Ball often uses customer contracts that let the company recoup higher materials costs, that clause was not written into a recent contract for delivery of cans to a customer in China. As a result, Ball had to eat costs that rose after the China contract was signed.
“We got dinged on that one,” McCarty said.
Rising inflation presents other challenges for businesses: higher borrowing costs, pressure to increase wages and rising prices for fuel.
“When the public has to spend an extra $5 or $10 to fill their tanks, that hurts, but the bigger problem is what fuel costs do to the entire supply chain,” said Sam Bruno of Denver-based trucking business Western Distribution Transportation Co.
Diesel fuel costs have risen in Colorado from $2.32 a gallon one year ago to Wednesday’s average of $3.03.
Higher shipping costs are being passed on to consumers at grocery stores and other merchants, Bruno said, which in turn is putting pressure on businesses to pay higher wages to employees.
“We’re seeing big-time pressure on wages,” he said.
Economist Rich Wobbekind at the University of Colorado’s Leeds School of Business said he’s seeing plenty of inflationary indicators – such as rising grocery costs and restaurants reprinting menus with higher prices.
“We are starting to see (inflation) leaking through on those types of issues,” he said.
Creighton University economist Ernie Goss said the prospect of stagflation is real if the Federal Reserve continues to increase interest rates.
He said he fears higher interest rates more than inflation, because “the inflation we’re seeing is already in the pipeline.”
“The bigger problem we’re facing is higher interest rates that will really be restraining economic growth,” Goss said. “In my judgment, these rate hikes are overdone.”
Staff writer Steve Raabe can be reached at 303-820-1948 or sraabe@denverpost.com.
