ECONOMICS REPORT - High Fuel Prices Fail to Spread Inflation

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ECONOMICS REPORT - High Fuel Prices Fail to Spread Inflation, at Least Not Yet
By Mario Ritter

Broadcast: Friday, September 23, 2005

I'm Bob Doughty¹ with the VOA Special English Economics Report.

 
 
While oil prices have climbed sharply, other costs have not followed. Inflation still appears to be under control.

Last week, the Bureau of Labor² Statistics reported that inflation in the United States rose by one-half of one percent in August. Energy costs, however, rose by five percent in the same month. But some prices have dropped. Clothing prices, for example, have fallen over the last year. Yet fuel prices can affect the economy in different ways.

The Energy Department says fuel prices reached their highest level during the week of September fifth. Americans paid an average of three dollars and seven cents a gallon, or almost four liters. That is not costly³ at all for drivers in many European countries and Japan. But Americans have never seen such prices for gasoline.

Oil prices were already high before Hurricane Katrina. Then, on August twenty-ninth, the storm hit states responsible for almost half of the nation's oil processing. Several oil refining centers in Louisiana and Mississippi remain closed.

 
 
And now Hurricane Rita threatens Texas, the biggest oil refining state.

Diesel⁴ prices, too, have reached new highs. That means higher fuel costs for trucks, trains and farm equipment. When oil prices rise, farmers also have to pay more for chemicals made with petroleum⁵ products.

High fuel prices also hit the air travel industry. Last week, two major airlines, Delta⁶ and Northwest, sought protection from their creditors⁷ on the same day. Both companies said increased fuel costs played a part in their decisions to seek protection in bankruptcy⁸ court.

In the past, airlines would simply charge more for travel when fuel prices rose. But today, airlines with different business plans like Southwest and JetBlue keep their prices low. That makes it difficult for other airlines to raise their prices.

The United States central bank has its own ways to fight inflation. Since June of last year, the Federal Reserve has raised interest rates. That raises the cost to borrow money. This week, the Federal Open Market Committee made its eleventh increase, to the highest level in four years.

The committee said strong growth in productivity has helped contain inflation. And it said the economic effects of Hurricane Katrina should be temporary. But the policy makers⁹ also said that "higher energy and other costs" could add to inflation pressures.

This VOA Special English Economics Report was written by Mario Ritter. I'm Bob Doughty.