Inflation hits the family dinner table

Many of life's necessities are becoming more expensive.

Let's start with breakfast. Eggs: up 5.2 percent so far this year. Butter for your bread: up 62 percent. A glass of 2 percent milk to wash it all down: It may rise as much as 50 cents a gallon next month.

Time to head to work: filling up the gas tank now costs 30 cents a gallon more since January.

After more than a decade of quiescence, inflation is returning - eating away at family pocketbooks and rippling through almost every segment of the American economy.

The latest evidence came Thursday, when the government reported that the first quarter Gross Domestic Product grew at a steady 4.2 percent rate, but inflation virtually doubled: from 1.2 percent annually at the end of 2003 to 2 percent now.

The rate would have been much higher if it were not for some big-ticket items, such as automobiles and computers, which came down in price. In fact, in the category most families would relate to - food and gasoline - prices rose at a 5.3 percent annual rate.

Those numbers echo the more widely watched Consumer Price Index, which shows inflation running at 5.1 percent annually. Those are the highest numbers since 1990.

The inflationary pressures could well lead to the end of a historically low period of interest rates. Although no immediate rate hike is expected when the Federal Reserve meets next week, analysts believe inflation is reaching the point where the central bank will signal that it will increase rates early this summer. The stock market, anticipating such a move, has already been spooked in recent days.

"Yes, inflation starting to creep up, but still creeping," says David Wyss, chief economist at Standard & Poor's in New York. "It's time for the Fed to start thinking about it, but not panicking about it."

Consumer prices have started to pick up in particular in the past three months. Before that, US companies, facing competition from abroad, had absorbed most of the price increases.

Now, however, the dollar is weaker, and Asian economies are expanding. "The modest acceleration of price increases reflects the welcome revival of pricing power and not the beginning of a problematic inflation," says Clifford Waldman, an economist for the Manufacturers Alliance/MAPI in Arlington, Va.

Unlike other inflationary periods, economists say there are some unusual twists this time. The US economy is now more attuned to the global economy. Last year, for example, the prices of imports fell. So far this year "they are up 2 percent and probably going higher," says Robert Gay, chief economist at Commerzbank Securities in New York.

One reason for the higher import prices is rising inflation in China. The Chinese have become major buyers around the world of everything from scrap metal to waste paper. They're now buyers of one-third of all the aluminum produced in the world. "They don't have the margins to play with, so they are passing on their higher commodity prices to their exports," says Mr. Gay.

China may be planning to do something about its booming economy. On Wednesday, Reuters reported that Chinese Premier Wen Jiabao, in an interview, indicated the country may need to slow things down to moderate inflation. This news dropped the price of gold, aluminum, and other metals.

Consumers may have noticed the higher prices this spring when they shopped for new clothes - most of which are made in China. At the Village Finery, a boutique in Shepherdstown, W.Va., prices are up 5 to 8 percent, says Heather Schott, the owner. "Even the more throwaway types of clothes that you wear for the backyard barbecue are up in price," says Ms. Schott.

For most consumers, the closest encounter with inflation comes when they go to the grocery store, particularly the dairy section. According to the US Department of Agriculture, butter has gone from $2.84 cents per pound to $3.46. Milk is actually down from the beginning of the year. But it will probably go up soon, since wholesale prices are slated to rise 50 cents a gallon in May.

Behind the rise in dairy products is a 1.8 percent reduction in the nation's cow population. Dairy farmers, with the lowest prices in history in 2002, started reducing their herd sizes when beef prices started rising. At the same time, the US, concerned about mad cow disease, cut off imports of dairy cows from Canada. "It's typical of an inelastic product - small changes have a greater impact on price," says Mary Keough Ledman, a dairy economist in Libertyville, Ill.

It could be worse. Many businesses are absorbing the price hikes in order to keep their customers. Take Il Forno, a restaurant on Manhattan's Upper West Side. Joe and Mike Chaghlil sell ham and egg sandwiches for $2.50. They used to make good money on them. But, in the past year, the price of the eggs went from $20 a case to $40, while the price of ham climbed from 42 cents a pound to 56. Even the bread became more expensive.

"We're probably losing money on each sandwich," says Joe Chaghlil, who has not taken a salary in eight months to help keep the restaurant in business. "But the customers won't pay more."

Yet other stores are starting to pass on part of their higher costs. That's the case at Schaller & Weber, a deli on Manhattan's Upper East Side. "The chickens have gone up like crazy, the pork prices are going up, the bacon - bacon is through the roof now," says Chris Cunningham, the manager who notes the store passes on about 75 percent of the the higher costs to consumers.

One place where higher prices have become evident - quickly - is a Papaya King on the East Side. The store, which sells about 1,500 hot dogs a day, has increased prices four times in the past 14 months. Next up: higher prices for the soft drinks. "We have to stay competitive within the fast-food price range," says Alexander Poulos, the general manager.

• Kimberly Chase contributed to this report.