Is Inflation Back?

Inflation has been dead so long that even a warning from Alan Greenspan inspires skepticism. "I don't think we're going to have an inflation problem," said economist Robert Brusca of FAO Economics following the Federal Reserve Chairman's words of concern accompanying a hike in short-term interest rates last week. "I think we have a Fed-credibility problem." Brusca is more worried about nascent signs of weakness, including eroding consumer confidence. A slowdown would quell inflationary pressures quickly, and one theory is that Greenspan's warning was part hype to justify jacking up rates so that he has room to cut them again if things deteriorate.

But something big has changed: after more than a year of rising raw-materials costs, companies are at long last managing to pass part of those costs along to consumers. American Airlines, among other flyers, has raised ticket prices even as it has squeezed in more seats to offset higher fuel costs. Bill Zollars, CEO of YellowRoadway, says the trucker is enjoying "the most robust pricing in my eight years" at the firm. Companies less sensitive to oil are raising prices too. Allied Waste just won a bid to dispose of Boston's trash for $82 a ton, up 6.5% from a contract last summer. Another small but significant bellwether: Campbell's, which hasn't raised premium-soup prices in five years, just went for a 5% hike. On Wall Street, meanwhile, money managers like Doug Sheres at Rice Hall James are moving into the stocks of companies with newfound ability to charge more--without chasing away business--figuring that's where margins will be expanding.

This is hardly a return to double-digit inflation, but it bears watching. A day after Greenspan uttered the words pricing power, a report on consumer prices revealed there has been a sharp uptick, and mortgage rates jumped. Long-term rates are highly sensitive to inflation, so that's a good place to watch for clues as to whether the inflation fears will turn into a fever. --By Daniel Kadlec