Is upward push on prices temporary?

WHEN Federal Reserve officials updated their personal forecasts for the U.S. economy in January, most of them expected inflation to be slightly lower this year than in 2003. Well, forecasting inflation has always been a tricky business.

What's puzzling officials is why inflation flared up so quickly this year. Part of the answer naturally is oil and the highly uncertain situation in Iraq. The inflationary impulse has been broader than oil though, and it's not clear exactly why.

While acknowledging that the inflation outlook has worsened relative to what they expected, a number of Fed officials have said publicly that there is no firm evidence that prices are soaring out of control.

In particular, labor costs are still rising very moderately, if at all. So as long as they don't start to outstrip strong productivity gains, underlying inflation pressures should remain subdued. The Commerce Department reported that the core personal consumption expenditure price index rose at an annual rate of only 1.7 percent in the first three months of the year and was up only 0.1 percent in April. That was in sharp contrast to the large increases in the core consumer price index in both March and April.

Fed Governor Ben S. Bernanke is hardly panicked over the strong inflation reports. "As we look ahead, core inflation appears likely to remain in the zone of price stability during the remainder of 2004 and into 2005," Bernanke said in a speech.

He then ticked off a long list of reasons why he thought that was the case: slack in labor and product markets, rapid gains in productivity, high profit margins, intensified global competition, and what he called "well contained" long-term inflation expectations.

That's a powerful list, which also indicates why officials have been so surprised at this spring's inflation blip.

Of course, oil prices have shot up, as have prices of many commodities, and the value of the trade-weighted dollar has come down. Still, none of those factors explains why companies suddenly feel they have the pricing power needed to pass those higher costs on to their customers.

The answer may be rooted in the relatively sudden complementary stages of economic growth in the U.S., China, Japan and other East Asian countries.

As orders for products at all stages of production began to pile up, suppliers have struggled to meet increased demand. In some cases, bottlenecks have developed, including at notoriously inadequate ports in China that have caused long backlogs of ships waiting to unload or take on cargo.

All this seems to have triggered a psychological shill among executives making pricing decisions. If goods are hard to get when you want them, why not raise prices?

Companies may feel they lace less risk of losing market share if they raise prices, or that they are not in a position to grab part of another company's share if they keep their price low.

Some of this newfound pricing power may be temporary. To the extent that delivery bottlenecks are the problem, ways may be found to ease them. Or demand may cool off, as it already is in some cases.

For example, China has taken several steps to cool down its overheating economy. Soybean crushers reportedly have begun to default on purchase contracts because they can no longer get needed financing. As a result, the soybean futures contract for July delivery, which nearly doubled between July and March, has since lost about 45 percent of the earlier gain.

Economist Ken Mayland of ClearView Economics in Cleveland last week drew a sharp distinction between a generalized inflation and what he labeled "one-time price increases." The former, he said, "requires a monetary policy response while there can be some forbearance of one-time changes in the price level."

Mayland put rising oil and food prices, as well as higher import prices stemming from the fall in the dollar, in the "onetime" category.

John M. Berry is a columnist with Bloomberg News.