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Inflation fears may be overblown, evidence shows

Rachel Beck Associated Press

NEW YORK — Worries about soaring inflation are starting to seem like childhood nightmares — lots of fear about what looms in the dark, but no evidence it’s really as scary as it seems.

Sure, it costs more to fill up at the gas pump and home prices are sharply higher, but otherwise, there hasn’t be the severe uptick in prices for everything from T-shirts to toys that had been expected amid surging raw material and commodities costs.

In fact, some companies are lowering prices, by choice or because the market demands it. And those that try to lift prices have been met on occasion with resistance from consumers.

No doubt this benign inflation outlook must please the Federal Reserve, which has raised short-term interest rates nine times since June 2004 to keep the economy growing while dampening inflationary pressures.

Just a few months ago, the buzz in economic circles focused on the possibility that rising energy costs — with oil surging above $60 a barrel — and other gains in commodities could push up prices for other products, and that could lead to stagflation. That happens when tepid economic growth mixes with rising inflation to create a toxic combination that can cripple the economy.

But as Merrill Lynch economist Kathy Bostjancic says, the “inflation bogeyman” doesn’t seem to exist, at least for now. “Since oil prices made a sustained break above $35 a barrel in early 2004, the pass-through effect on other goods and services has been minimal,” she said.

That has largely happened because competitive pressures make it very difficult for companies to raise prices significantly. Productivity growth also has allowed many companies to lower costs by doing more work with less, and wage pressures continue to be contained.

Recent inflation data shows wholesale prices, excluding food and energy costs, have risen at a tame 2.6 percent for the last 12 months, while core consumer prices rose only 2 percent over the same period.

Probably the best evidence of a pricing pullback can been seen in the U.S. auto industry. General Motors Corp. has been running a popular plan that gives customers buying 2005 vehicles the same discount employees get. That has cut prices by $400 to $500 on average from what consumers paid in May, before major cash rebates.

Ford Motor Co. and DaimlerChrysler AG’s Chrysler Group are now running similar deals, and all three automakers will offer their promotions through Labor Day.

After that, GM will deepen its price cuts by lowering the costs on 30 of its 76 2006 models. For instance, the base price of the 2006 Chevrolet Malibu is $17,990, or $1,835 below the 2005 model.

The average prices of books, music and videos at Inc. fell 2 percentage points in the last quarter. In addition, shoppers at the Web retailer saved $200 million on free shipping deals so far this year. All that discounting helped boost sales 26 percent in the quarter ended June 30.

Big price declines are also apparent in the electronics business, as the cost of manufacturing components are dropping as marketplace competition surges. Sony Corp. expects the prices of its flat-screen TVs to fall 50 percent in Europe this year, 30 percent in Japan and 20 percent in the United States.

Even companies in the service sector, which have had more pricing power in recent years than those in other sectors, are indicating inflation is moderating.

The Federal Reserve Bank of Richmond’s service sector survey for July showed that retailers anticipated prices would advance 1.32 percent in next six months, a slower rate than the 2.47 percent rise that they had expected in June. Services firms, which include businesses such as dry cleaners, restaurants and roofers, were forecasting price growth at 1.58 percent in July compared with 1.84 percent expected in June.

That’s not to say there aren’t any cases of successful price increases. Chemical manufacturer DuPont Co. said higher prices and sales from new products helped its second-quarter profits more than double from a year ago. Higher fares helped many airlines, including AMR Corp.’s American Airlines and Continental Airlines Inc., turn profits in the second quarter in spite of sky-high fuel prices.

General Mills Inc., however, is still trying to recover from raising its cereal prices on average 4.3 percent last year to offset higher cost pressures. General Mills lost sales to the cheaper private-label brands. Its cereal sales fell 5 percent during the fourth quarter that ended May 29.

Should oil or other product costs continue to climb, it could be that more companies are faced with little choice but to raise prices. For now, though, it seems that there isn’t much behind the inflation fears.

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