Inflation's latest litmus test
Commentary: Chemical price hikes set up chain reaction
SAN FRANCISCO (MarketWatch) -- Fed Chairman Ben Bernanke's two-front battle against inflation and stagnation just got a little trickier with deep-seated inflationary pressures welling up in the chemicals industry.
Dow Chemical (DOW ![]()
DOW) announced Tuesday it's jacking up its prices to keep pace with runaway energy and raw-materials costs. This time the price hike is a hefty 25%. That comes on top of a 20% hike in late May. See full story.
The Dow Chemical Company
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Chemicals are often dismissed as those "other" commodities, taking a back seat to oil and grain. The reason is fairly obvious: Not many of us track styrene prices, whereas we confront fuel and food bills daily.
But there's a big difference: Fuel and food are not figured into the inflation index, while chemicals are.
Chemicals reside at the bottom of the global manufacturing chain. As such, they are leading economic indicators both in terms of pricing and inventory.
So when the biggest U.S. chemical company lifts its prices, it sets in motion a trend that gradually ripples up through the manufacturing process, ultimately dragging wholesale and retail prices higher as well. When they emerge as durable goods, chemicals become an integral part of the Fed's inflation calculus.
There are other disconcerting upward pressures building these days at the bottom of the manufacturing chain. Iron ore prices are surging, pulling up steel prices in the process. Several of Japan's biggest steel producers have just caved to demands from miners Rio Tinto (AU:RIO: news, chart, profile) and BHP Billiton (BHP ![]()
BHP) to accept a doubling of iron-ore prices, mirroring similar spikes seen elsewhere in the metals industry. See full story.
BHP
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It takes several months for higher chemical and ore prices to wend their way to the retail level. And the process is being slowed somewhat by a sluggish economy. But inflationary seeds are being sown these days at a pace that is certain to raise concerns among monetary-policy makers around the world.
And in Washington, it raises the stakes in the Fed's already delicate debate over which demon poses the bigger threat to the economy: inflation or the need to keep interest rates low to revive a struggling economy.
Dow's decision to jack up chemical prices just made Bernanke's search for that magic middle ground a little tougher. See related Fed story.
-- Jim Jelter 
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