Is Good News Cause for Concern?

The Lehmann Letter (SM)

There was more good economic news today.

The Conference Board reported that its Leading Economic Indicators rose again in January:

http://www.conference-board.org/press/pressdetail.cfm?pressid=4131

Although January’s gain was small, it follows upon strong increases in November and December. Taken together these improvements are part of a continuing pattern of economic expansion.

A growing economy always raises the question: Will rising demand generate inflation? That is especially relevant because of recent commodity-price increases.

Yesterday the Bureau of Labor Statistics (BLS) reported that wholesale prices grew by 9.6% annually in January:

http://stats.bls.gov/news.release/pdf/ppi.pdf

And today the BLS reported that January consumer prices rose 4.8% annually:

http://stats.bls.gov/news.release/pdf/cpi.pdf

Those numbers are higher than we’ve experienced lately but are still not cause for concern because borrowing and spending remain weak despite the economy’s recovery. Robust inflation requires robust borrowing and robust demand to bid prices rapidly upward.

But even if escalating inflation is not yet upon us, rising commodity-input prices could pose a threat for US businesses. They may have to pay more for the raw materials they purchase without being able to pass on the increased costs to their customers. Why? Because weak demand may exacerbate competitive pressures that prevent businesses from raising prices. That would squeeze their profit margins and their earnings.

© 2011 Michael B. Lehmann