‘Whiff’ of inflation can be good, bad - East Valley Tribune: Business

‘Whiff’ of inflation can be good, bad

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Posted: Saturday, April 17, 2004 7:01 am | Updated: 6:18 pm, Thu Oct 6, 2011.

GARRISONVILLE, Va. - When Paddy’s Steakhouse & Pub opened in December 2002, a 12-ounce prime rib sold for $15.99. Today, after a run-up in beef prices and a growing clientele, the menu lists that same cut for $19.99.

‘‘You don’t want to change your prices because people will think that you’re trying to rip them off,’’ said owner Michael Brosnan, who absorbed the higher costs for several months before reprinting the menus. ‘‘But you’ve got to do what you’ve got to do.’’

In fact, with energy and raw material costs on the rise and demand for goods and services picking up, gasoline, milk, soybeans, paper products, lodging and clothing are all more expensive these days. As economist Sherry Cooper sees it, there is ‘‘a whiff of inflation in the air.’’

The ability to raise prices is good news for many U.S. industries after several tough years, but consumers hooked on cheap goods and low interest rates are in for some disappointment, said Cooper, chief economist at BMO Nesbitt Burns Securities in Chicago.

The Labor Department reported this week that consumer prices rose 0.5 percent in March, bringing the annual rate of growth for the first three months of the year to 5.1 percent — two and a-half times the rate in 2003.

The data surprised many on Wall Street, sending stock prices down and bond prices higher amid expectations that the Federal Reserve would begin raising shortterm interest rates from record lows sooner rather than later.

Shoppers and small business owners said the government report merely confirmed what they already knew.

‘‘Prices have definitely gone up,’’ said 50-year-old Carolyn Parker, who spent her lunch break the other day hunting for bargains at discount retailer Ross Dress For Less in Garrisonville, 40 miles south of the nation’s capital. Major department stores in the area such as Hechts and Belk routinely advertise sales, ‘‘but the list prices are a lot higher than they used to be,’’ said Parker, who bought a spring coat at Ross for $25.

Timothy Baroody, director of economic development for the region, said home values have risen 34 percent since 2002 because of the booming housing market, pushing up property taxes and other costs along with it.

‘‘Folks here have different views on what that means,’’ Baroody said, drawing a distinction between longtime residents and affluent newcomers to this Washington suburb. ‘‘It makes me happy because my house is worth that much more. But there are older people living on fixed income and that hits them differently.’’

Baroody said the prospect of rising interest rates will likely force residential and commercial developers to reevaluate the pace of growth in the region over the next 12 to 18 months.

When interest rates rise, ‘‘it immediately affects my digestion,’’ said John Marshall Cheatwood, who opened a real estate services business in Stafford at the start of the year. ‘‘It’s going to reduce the number of first-time home buyers,’’ he said.

About 125 miles to the south and west of Garrisonville, the prospect of accelerating inflation seems less of a threat to Keith Dunn of Oak Hill Farms, which is enjoying some of the highest prices for soybeans in more than a decade.

A year ago, the Sussex County farmer was earning razor-thin profits, hindered by rising costs for diesel and fertilizer, as well as recent agriculture legislation that made peanuts less profitable. Now prices for soybeans and corn are up more than 50 percent from last year, enabling Oak Hill to absorb those extra costs and earn the kind of money that Dunn said he hasn’t seen ‘‘in several years.’’

Indeed, it is the rising costs of soybeans and corn, which are fed to cattle, that has made beef more expensive in the grocery store and at restaurants like Paddy’s Steakhouse.

Similarly, milk prices, which hit a 25-year low in 2003, have rebounded to record highs, as supplies tighten and the cost of feed goes up.

Nationwide, a gallon of milk averaged $3 at the beginning of April, up 15 cents from the previous month, and the Agriculture Department said dairy products could cost 4 percent to 6 percent more this year.

The upswing in the agriculture business has been a boon to Fisher Barton, a Watertown, Wis., maker of farm equipment and lawnmower blades, helping to offset ballooning operating costs because of soaring prices for steel and copper, two key raw materials. Fisher Barton has had to raise prices, at least temporarily, president Dick Wilkey said.

Economists expect the Federal Reserve to respond to these trends by raising interest rates this summer.

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