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Inflation Picking up Momentum

Excluding energy, consumer prices rose a modest 2.2 percent last year, according to year-end government figures released this week. But that seemingly benign figure conceals growing inflation pressures that could bedevil policy-makers this year, some economists believe.

By any measure inflation is accelerating. The so-called "core" inflation rate, which ignores food and energy costs, rose 2.2 percent compared with 1.1 percent in 2003, when the possibility of deflation became the dominant concern for Federal Reserve Chairman Alan Greenspan and his colleagues. Overall consumer prices rose 3.3 percent last year, up from 1.9 percent in 2003.

But last year's increases understate the true inflationary pressures, said Anirvan Banerji, research director of the Economic Cycle Research Institute.

"Inflation pressures are simmering more than most people acknowledge," he said.

He observes that for so-called "tradable" goods, such as apparel, electronics, cars and furniture, inflation is declining or prices actually are falling, especially when adjusted for rising quality. To put it another way, manufacturers and retailers have no pricing power in industries where there is a "China price."

But service-related areas are largely immune to these forces of globalization, and they are subject to growing inflation as the expansion ages. College tuition is perhaps the prime example. Tuition and fees are up 42 percent over the past five years, a period in which overall prices have risen only 13 percent. The costs of medical care and personal services also are rising much faster than inflation.

Banerji compares the situation to the old economist's joke about a man with one foot in a bucket of ice water and one foot in a bucket of boiling water. On average, he is quite comfortable.

"Of course we're not going to go to 1970s-style inflation -- that is obvious," he said. "But that does not mean that inflation is benign."

With virtually every major economy in the world expanding, any excess capacity will be soaked up quickly, resulting in higher prices of imported goods. The falling dollar makes the situation worse, increased pressure on import prices...