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Inflation bite worse than CPI mark

Consumers' sense that costs are going up faster than the government-tabulated rate is pretty accurate.

If it feels as though inflation is worse than government economists claim, that's because it is.

The Labor Department reported Friday that its best measure of on-the-ground inflation -- the Consumer Price Index, or CPI -- inched 0.2 percent higher last month. On its face, 0.2 percent doesn't sound like a particularly scary number.

But behind the statistics, there's another reality not easily tracked by government indexes. Anyone who fills up a gas tank, pays tuition, buys insurance or eats pizza can attest to the fact that price hikes seem to be coming from all sides these days -- and they're coming a lot faster than 0.2 percent a month.

A gallon of regular gas costs 31 percent more than a year ago, for example. Tuition at an Oregon public college is up 9.9 percent and due for another 6.5 percent increase this fall. Homeowner's insurance premiums in the state have risen 9.3 percent since 2002.

And pizza, that most popular of American foods? Prices are on the rise there, too, thanks in part to an almost 90 percent increase in the cost of mozzarella.

"For the pizza industry, it's a killer," said David Rosenberg, vice president of Portland's 14-store Pizzicato Gourmet Pizza company. "Instead of spending $40,000 a month on mozzarella cheese, I'm spending $60,000."

Those break-the-bank prices are the delight of dairy farmers, who had complained for years about how little they made on milk. They're less welcome, though, for consumers of milk, cheese and ice cream.

On top of it all, a weaker U.S. dollar has made imports cost more. So Rosenberg is paying significantly more for Greek olives and Italian olive oil than he was a year ago.

To deal with the added costs, Rosenberg recently instituted a temporary "cheese surcharge" of 25 cents to 75 cents on every pizza he sells.

As they crop up elsewhere, such costs are driving shoppers such as Portland's Barbara Petzing, 72, to adjust what they buy and where they eat.

"I love mozzarella and Jarlsberg cheese," she said Friday, "but it's too expensive to eat. It's up to $8.50 a pound." Petzing, a retiree who said she receives Social Security and a small pension, also said she is dealing with increases in her car insurance, rent and prescription medications.

Lakshman Achuthan, an economist at the Economic Cycle Research Institute in New York City, said of the incipient inflation: "People are not imagining it."

Not imaginary, but normal

He's also quick to point out that what's happening now is normal.

"Inflation follows the business cycle, both up and down," he said of the natural series of expansions and contractions in the economy. "What we're experiencing now is not strange or unusual.

"The price of services started rising in 2003 in the 4 to 5 percent range. It's happening, but it doesn't show up in the CPI."

The reason is that the index looks backward at prices rather than forward, misses many of the things people spend their money on and distorts the importance of others, Achuthan said.

Essentially, the CPI is a wide-ranging list of goods and services tracked by the U.S. Labor Department's Bureau of Labor Statistics and announced monthly. It's supposed to represent the breadth of American consumer spending.

It is a legitimate gauge, but it does have drawbacks.

The backward glance, for example, shows inflation running at 2.3 percent in the past 12 months -- but based on the first four months of this year, the rate is projected to increase to 4.4 percent in 2004.

It's not just that the index is playing catch-up with prices, either, Achuthan argues. Because of a statistical quirk, the CPI has actually undercounted inflation in the recent past and may overcount it in the near future.

Housing price a factor

The reason has to do with the price of housing, which composes more than 40 percent of the index. The CPI uses a complex rental equivalent formula that does not reflect the actual rise and fall in U.S. home prices.

During the economic slowdown of recent years, low interest rates allowed more people to buy rather than rent. Fewer people were in the rental market, so rents dropped.

"Now, as interest rates rise, that downward pressure will be gone, rents will recover, and that's what will move the CPI up," Achuthan said.

The same thing happened with cars, said U.S. Bank economist John Mitchell.

Beginning a couple of years ago, Mitchell said, "Everybody bought new cars because of zero financing." With all the trade-ins, the bottom fell out of used car prices.

Now, he said, rising interest rates will make new car deals less attractive, and used car prices will return to normal levels, which will boost the CPI.

But consumers felt all this before the economists could show it in their numbers, it appears from looking at surveys of inflation expectations.

Consumer outlook accurate

When asked in April what they thought the inflation rate would be for the year ahead, consumers predicted a rate of 3.2 percent, said Richard Curtin, director of the University of Michigan's Surveys of Consumers. Last year, consumers predicted an inflation rate of 1.7 percent -- and they were uncannily accurate. Historically, consumer expectations have been very close to what actually happens, Curtin said.

An annual rise of 3.2 percent also is consistent with Achuthan's forecast based on turning points in the business cycle.

"Clearly the direction is up in the CPI," he said. "How much I can't say, but it's not going to be runaway inflation."

The economy is rebounding, and even $40-a-barrel oil isn't slowing it down, Achuthan noted. It has good momentum, at least through the next two or three quarters.

The job picture is less clear, but there are a couple of months of job growth to come, he predicted. To offset the coming higher cost of living, "I would suggest you make hay now," Achuthan advised.

"If you need a higher-paying job, apply for it now. Business managers will be more willing to give you a raise and to hire you. Don't wait," he said.

Rising prices can squeeze consumers who aren't earning more, but they could have a positive effect on U.S. companies. If companies can charge more for their products, the pressure on them to cut costs by outsourcing will decrease, and fewer jobs will be lost because labor is cheaper overseas.

Nevertheless, if you're Michael Gabner, a Portland disabled Vietnam veteran, or his mother, Norma, you're feeling the pinch now.

"I don't eat out," she said Friday. "I pay more for milk, cheese, ice cream, medicine, insurance and just a lot of other little things."

And Gabner said, "Inflation doesn't feel like 2.3 percent to me. It seems like 5 percent or more."