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April 24, 2006

What could re-ignite inflation

The overall numbers on inflation continue to be good: Producer prices last month fell, and it doesn't look like higher energy prices are translating into higher prices for other products and services. So if energy costs won't spark higher inflation, what could?

N.C. State University economist Mike Walden says, "The two things that worry economists right now ... are the double whammy, if you will, that we could get on inflation from lower worker productivity and higher labor costs.

"Labor costs are still a very important factor in the economy," says Walden, a specialist with the North Carolina Cooperative Extension Service. "They account for 57% of all costs of production, in comparison, gasoline accounts for only 10 percent of costs.

"And the labor market is getting tighter. So that's going to put upward pressure probably on labor costs," he adds. "At the same time we see the growth in output per worker, productivity, [is] still going up, but it's going up at a slower pace. In fact, recently in went up at the slowest pace in three years.

"So if you combine these two things together that could certainly put upward pressure on prices, and that I think is what most economists are watching rather than energy prices."

Posted by deeshore at April 24, 2006 07:18 AM

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