“Can I get the 2 for $3,” said 64-year-old Sarah Cabezas.
“It’s 2 for $4 now,” retorted the McDonalds cashier.
“What? When did it go up?” the befuddled high school teacher exclaimed.
Cabezas’s exclamation was a first-hand account of the sudden but painful pinch of inflation.
The Labor Department said on Thursday its Consumer Price Index rose 0.5 percent, the largest gain since June 2009, after increasing 0.4 percent in January. The February increase was the fastest rise in the inflation-measuring index in more than year and a half.
However, economists are not concerned. The core CPI rate, which excludes food and energy only increased by 0.2 percent after advancing by the same margin in January. Economists feel that the overall rate is being driven by higher food and energy prices.
“Virtually every measure of price behavior shows inflation pressures building,” said Bernard Baumohl of the Economic Outlook Group.
The small increase being felt by Cabezas may only raise her daily food budget by a couple of dollars but businesses like Bronx County Collision have had to absorb the increase price of business for the first half of the year.
“People don’t like you already because you tow their car. But when you tell them they have to pay close to $300, they flip out more than usual,” said “Big” John De Simone, owner of the Bronx based towing company.
But economists fear that core CPI rate is climbing at a faster than expected rate. Baumohl and other economists are in agreement that on its current trajectory the indicator will likely reach the Federal Reserve Board’s projected target rate before the summer.
Yet the Federal Reserve remains steadfast in its latest massive round of Quantative Easing or how some call it QE2. The Federal Reserve is currently buying up Treasury bonds in excess of $600 billion in an attempt to keep the U.S. economic recovery charging ahead.
This policy has been panned by detractors as a possible road to runaway inflation, a fear that is fueled by fears Detractors are afraid of huge price jumps at a time when American’s have little bargaining power for wage increases.
However, the Fed feels that consumers are capable of absorbing the increases for the short term a sentiment expressed by Cabezas.
“Despite the core CPI increasing expectations for a 0.1 percent gain, it suggested that surging costs for energy and other commodities, which have been hitting producers and consumers alike, had yet to generate the type of broad inflation that would spur the Federal Reserve to respond,” said Ellen Beeson-Zentner of Bank of Tokyo-Mitsubishi UFJ.
The Fed and economists like Beeson-Zentner point to people like “Big” John De Simone as an example of businesses absorbing higher prices in order to remain competitive.
De Simone’s Bronx based towing business only recently decided to increase their tow and impound fees to cover the rising cost of fuel for their 7 trucks.
Their fleet of vehicles has been chugging on gallons of gasoline for over 10 years, with the last two being especially painful. “Big” John noted that the average fill up cost for a truck as $80 but has increased to $120 since November.
“We’re a tow truck company. We can’t do business without the trucks so I got to shell out so much more, so when people scream at the price of gas you can imagine how I feel, I have 7 trucks!,” said De Simone.
Beeson-Zentner added, “If core inflation continues to rise, while job growth remains slow and the U.S. expansion is threatened by developments in the Middle East and Japan, then the Fed will be in a very tight spot.”
“With what appears to be a definitive turn in core inflation, the Fed may be running out of time to spare before tightening monetary policy,” said the Bank of Tokyo economist.
This could place the Fed in a “lose-lose” situation. As described the Fed may have to change its position on its Quantitative Easing policy as they have to decide to fight higher inflation or slow growth.
“The Fed’ two principal mandates – maximizing jobs and containing inflation -are moving in opposite directions. The last time the Fed faced such a quandary was the late 1970s,” said Baumohl.
Baumohl is noting how then Federal Reserve Chairman Paul Volcker decided that inflation was the greater threat to the economy. A position that might have to be revisited by current Federal Reserve Chairman Ben Bernanke.
“Bernanke will have to fight inflation, not unemployment, the reason? Inflation is suffered by everyone, while unemployment hurts just the jobless,” said Baumohl.
As the core inflation continues to rise and job growth remains slow people like Cabezas and De Simone will have to make harder decisions when planning their daily budgets. Cabezas has already substituted lower priced goods for higher-priced ones in hopes of tempering the effects of price increases.
“I’ll buy a big tub of not-so good yogurt that cost me less, but I won’t give up my egg McMuffins. They are just too dear to my morning,” quipped the teacher.