TOPICS > Economy

Increase in Consumer Prices Raises Fears of Inflation

June 14, 2006 at 6:35 PM EDT

RAY SUAREZ: The government’s latest report showed inflation is continuing to rise in consumer prices, which have now grown by just over 4 percent within the past year.

Energy and gas prices were a significant part of the increase. So how are businesses coping with rising prices? And what do those price rises mean for the wider economy?

For that, we turn to Patrick Quinn, co-chairman of the Truckload Carrier U.S. Xpress Enterprises and chair of the American Trucking Associations, a federation representing national, state and local interests for the industry.

Tom Zimmerman is secretary and treasurer of Spectrum Automation, a family-owned company that manufactures parts and equipment for a variety of industries.

And Alice Rivlin, a former vice-chair of the Federal Reserve’s Board of Governors, she’s now a senior fellow at the Brookings Institution in Washington, where she follows U.S. fiscal and monetary policy.

And, Ms. Rivlin, third straight increase, energy prices a big part of the rising inflation rate. What do you make of the numbers?

ALICE RIVLIN, Brookings Institution: Well, exactly that. Energy prices have been pushing up now for quite a long time. That is not news to anybody, gas at the pump.

And that means that a lot of other things get more expensive. They have to be transported. And it means that other prices, the core inflation rate, as the economists say, moves up, too.

It didn’t move up much for a long time. The economy was quite resilient in the face of the oil price increases and the gas price increases. But now we’re beginning to see the core move up, as well.

RAY SUAREZ: Why is that? When you strip out energy and food, the two so-called volatile factors, inflation still went up, but, as you say, it took a while to happen. Does that gas price sort of have to soak into the pores of the economy?

ALICE RIVLIN: Well, maybe, but we don’t use as much energy as we used to in the ’70s, so it doesn’t push through quite as much as it used to.

And then, people are — businesses are reluctant to raise their prices. They’re in a very competitive situation, so they try to absorb the energy price increase for a while, and then it becomes impossible, and they pass it along to their customers.

Fixed costs increased over the year

Patrick Quinn
U.S. Xpress Enterprises
The three major costs are labor, followed by fuel, and followed by equipment. And all of those -- there are price pressures on those, on those three entities, these three elements.

RAY SUAREZ: Patrick Quinn, as a trucking company owner, how have you seen your fixed costs change over the past year?

PATRICK QUINN, Chairman, American Trucking Associations: Well, the fixed cost, for example, of diesel fuel today, it's 64 cents a gallon higher than it was the same week one year ago. And while we have a surcharge program in place, as almost all carriers do, that recovers approximately 80 percent of the cost of fuel, so 20 percent, which relates to the empty miles that you travel and the idle time that the truck is sitting, that is not recovered in the surcharge.

So you either eat that or you have to pass that cost on, in addition to the surcharge, through higher prices.

RAY SUAREZ: Have your customers been willing to take on those higher prices? Have you gotten any pushback on that?

PATRICK QUINN: I think, you know, yes, you get some pushback, but I think customers also understand that it's essential -- you know, trucking moves 70 percent of the tonnage in the United States today in the economy, and they have to have us.

And the three major costs are labor, followed by fuel, and followed by equipment. And all of those -- there are price pressures on those, on those three entities, these three elements.

RAY SUAREZ: Well, you mention this price pressure in all of those places. Obviously, gas is your largest single one. But have seen other costs of doing business going up along with gas?

PATRICK QUINN: Yes, we have, because, for example, you know, a lot of it relates to government mandates. The 2007 engine, which is a very clean engine, comes out mandated January 1. That will probably cost in the $7,000 to $9,000 more than the current engine.

Ultra-low sulfur diesel becomes effective October 1. That will be five to six cents a gallon higher than the price we're paying today. All of that is really mandated; it helps the environment, and we're in favor of that, but there is a cost to that. And ultimately, as consumers, we all bear that cost.

Passing costs on to customers

Tom Zimmerman
Spectrum Automation
The fuel surcharges and energy costs are increasing the underlying inflationary pressures, and we have to just push through to our customers as best of our ability.

RAY SUAREZ: Mr. Zimmerman, is your cost of business being affected lately, too?

TOM ZIMMERMAN, Secretary-Treasurer, Spectrum Automation: Oh, most certainly. I agree with both your guests there. The fuel surcharges and energy costs are increasing the underlying inflationary pressures, and we have to just push through to our customers as best of our ability.

RAY SUAREZ: Are petrochemicals in other things that you buy, things that the public might not even associate with the price of oil going up past $70 a barrel?

TOM ZIMMERMAN: Well, there's a whole lot of things to take into effect, cost of hot-rolled steel and underlying energy costs. There's plenty of things taking hold of our costs.

RAY SUAREZ: Like Mr. Quinn, have you been able to pass on your increased costs to your customers?

TOM ZIMMERMAN: We have been able to, at certain times, but it's a very competitive environment, and we have to pick and choose when we can push our pricing through.

RAY SUAREZ: So where does that cost come out of, then?

TOM ZIMMERMAN: It just comes out of the bottom line. We have to lower our expectations and hit it on the margins.

RAY SUAREZ: Well, along with your own costs of doing business going up, the cost of living is going up for your workers. Is there also pressure on the wage side?

TOM ZIMMERMAN: Our costs of living increases have been going into our health insurance increases, so, really, our wages have stagnated for the entire decade, basically.

"The days of saving are over"

RAY SUAREZ: Well, Mr. Quinn, along with burning more expensive diesel in your trucks, your drivers are burning more expensive gasoline in their own cars. Are they pushing you for raises?

PATRICK QUINN: And, certainly, there's a shortage of qualified drivers in the industry today. As a consequence, driver wages have risen significantly in the past three years.

And I think that shortage is expected to continue in the future, and so there's going to be continued wage pressures on carriers to raise driver wages and also because their costs of living, like you say, has increased.

RAY SUAREZ: Does that mean eventually, Mr. Quinn, that people are also going to have to expect to pay more for a head of lettuce, or a five-pound bag of sugar, or a sack of flour?

PATRICK QUINN: Well, if you look at -- if you go back to deregulation, it happened in 1980, in 1981, the first full year, transportation was 7.3 percent of GDP. Last year, it was 5.5 percent.

But I think those days of a savings are pretty much over. I think we're going to have price pressures, as we discussed, going forward. And, yes, ultimately, we as consumers of that product are going to pay for those increases.

RAY SUAREZ: And, Mr. Zimmerman, what do you see, as far as your time horizons? You say that you took the added price of your materials and your energy out of your profits. Is that something that you can just bear to do for a limited amount of time, or does that become sort of your method of operation for a long way out?

TOM ZIMMERMAN: Well, fortunately, we're blessed in that we're a value-added manufacturer of equipment. But a lot of our customers who are making parts for the automotive industry, they're diminishing, and they're going to cease to exist.

RAY SUAREZ: Well, when you say "a value-added manufacturer," what does that mean?

TOM ZIMMERMAN: Well, we provide automation equipment, so that we're not tied to a specific piece price to make our profit to be turned on a tenth of a cent. When we make a piece of equipment, we're capable to be able to be more efficient and provide value added to our customer. Therefore, we're not tied into a contract whose stuck with steel prices and underlying inflationary environment.

RAY SUAREZ: But gas that remains -- oil that remains at $70 a barrel, is that something that you can eventually live your way into, or are you stuck with permanently reduced profits then?

TOM ZIMMERMAN: I think we'll be able to live our way through that, but everyone's going to have to accept that it's going to be more expensive to do business.

Inflation not as high as the 1970s

Alice Rivlin
Brooking Institution
The Federal Reserve is a little bit worried, and they should be, that inflation might get into unacceptable levels, but it's not the situation that we had in the '70s, where inflation might just sort of take off and be a really serious problem.

RAY SUAREZ: Well, Alice Rivlin, from what you just heard from these businessmen, how does this extrapolate out to the wider economy?

ALICE RIVLIN: Well, I think we've heard some of the worst from these two gentlemen because their businesses are fuel-intensive, especially trucking. And if the oil price stays where it is or continues to rise, which is not unlikely, these kinds of stories are going to be there.

But the rest of the economy is not totally dependent on energy. We are less dependent on energy, actually, than we were in the 1970s, because we don't make as much stuff. Much more of our economy is service-oriented and not such a big consumer of energy.

And over the last few years, inflation has been quite quiescent; it hasn't been going up very fast. And, even recently, the increases have been modest.

Now, I think the Federal Reserve is a little bit worried, and they should be, that inflation might get into unacceptable levels, but it's not the situation that we had in the '70s, where inflation might just sort of take off and be a really serious problem. The economy is less inflation-prone than it used to be.

RAY SUAREZ: But what about Mr. Zimmerman's example of not being able to on pass his rising cost to his customers because of the competitive environment? Are there a lot of manufacturers that at some point are going to have to raise their prices, and we just haven't seen that yet, that it will eventually send its shockwave through the economy?

ALICE RIVLIN: There are some, and that will likely happen. But productivity increases have been very high, especially in manufacturing. They're getting more out of the inputs that they put in and out of their workers. And it is isn't likely that we're going to have great inflation in manufacturing or, I think, anywhere else.

RAY SUAREZ: Like tumbling dominoes, Mr. Quinn's customers, who have taken his fuel surcharge, are probably charging their customers more, but they're doing this in an atmosphere of slowly growing wages. Are these pains ones that will be felt at the household level, as well?

ALICE RIVLIN: To some extent, yes, but, except for food and energy, prices have been going up very slowly, accelerating a little bit in the last few months, but basically at a pretty reasonable rate.

RAY SUAREZ: But you think, at the end of June, there's another interest rate rise coming to answer this inflation?

ALICE RIVLIN: I think there will likely be another increase in the Federal Reserve's short-term interest rate, just as a signal that they are a bit worried about inflation, but Federal Reserve officials have also been saying that they see a slight slowdown in the economy coming in the second half of the year, which will take some of the pressure off these price increase.

So I'm not sure that they will keep up this increase in the interest rates for very long.

RAY SUAREZ: Ms. Rivlin, Mr. Quinn, Mr. Zimmerman, thank you, all.