Kiplinger Connection
The Economy • World Business • Pinching Pennies

The Economy: Why does this inflation feel worse than it actually is?
World Business: Dollar bottoms out against euro.
Pinching pennies: Making cents out of steel.

The Economy
Is inflation spinning out of control? Government number crunchers and policymakers throw around figures that don’t seem terrible. But anyone paying the bills for a household or a company knows that the cost of living or running a business is more painful today.
We expect overall prices to rise 4% this year. That’s about the same pace as in 2007 and what we’ve seen so far in 2008.

Why does it feel much worse than that?
Incomes are struggling to keep up. Wage growth is just 3%, and personal income, which includes Social Security, interest earned, and bonuses, is up only a tad more than prices.
And food and energy costs are soaring. More than half the Consumer Price Index jump this year comes from them, with food prices up about 5% and gasoline, a whopping 20%. Because consumers must buy these items often, shoppers are more sensitive to the price hikes.

Excluding food and energy ... a 2.3% rise in the core CPI, a gauge of less volatile, underlying prices. Costs of the 75% of household expenditures that aren’t related to food or energy are rising more slowly and in many cases ... computers, cars, TVs, and apparel, to name a few ... are falling. Rents ... 30% of the total CPI and used to approximate housing costs for homeowners ... are fairly flat.

When will inflation abate? Possibly not for several quarters.
But this is no repeat of 1973-1981, when the CPI rose 9% a year, on average, as wage hikes built into union contracts spiraled upward.
Many firms can’t boost prices: Retailers and computer makers, for example, plus builders, furniture stores, and auto and appliance makers. Although 63% of S&P 500 firms say they’ve raised prices since last year, only 26% of the firms say the hike was enough to cover cost increases.
And we expect oil prices to moderate later on this year. Oil around $100 a barrel and gas near $3 a gallon could break the cycle.
Plus, the Federal Reserve is cooling inflation expectations, convincing financial markets that it can successfully pilot the economy past the shoals of no growth and high inflation, tweaking rates as needed.

Meanwhile, simply more of the same spells subpar economic growth, with GDP growing at a meager 1.5%-2% annual rate through most of 2009. With real disposable income likely to be stagnant, households won’t spend as much, prolonging and dampening recovery from the economic downturn.

World Business
Odds are the dollar has finally found its floor against the euro. Traders are factoring in the increasingly sour economic news from Europe, as well as signs that the U.S. economy is likely to pick up in the second half. Also helping: Federal Reserve signals of a pause in further interest rate cuts while it measures the effects of past cuts and of tax rebates now being rolled out. Barring more credit shocks, the euro should continue trading in the mid-$1.50s to $1.60 range for several months. By year-end, expect it to drop back below $1.50.

With top U.S. credit rating firms dubbing Brazil creditworthy ...
A wave of investment is sure to follow, helping Brazil spend more on infrastructure, which it needs to grow, and even sustain, its economy. Mutual funds, pension funds, and hedge funds will all join the party after having stayed away when Brazil lacked investment-grade status.
Several U.S. firms will benefit from the increased spending, including Caterpillar, Illinois Tool Works, Duke Energy, and Alcoa.
Among products in demand: Construction equipment and services, telecommunications gear, traffic control equipment for airports and ports, plus building cranes and material-handling machinery. Also concrete, asphalt, electrical wire, and a variety of spare parts.

Pinching pennies
With prices of copper, zinc, and nickel going through the roof ...
Uncle Sam will begin making pennies and nickels from steel, as soon as Congress gives the OK later this year. Though also pricey, steel is still nowhere near as expensive as the other metals. Clad in alloy, the new coins will look and feel the same as they do now.
The switch will save the government about $100 million a year. Copper and nickel have risen 300% ... zinc, 450% ... since 2003. At present, it costs 1.26¢ to produce each penny and 7.7¢ to turn out a nickel. The dime, which costs 4¢ to make, and the quarter, 10¢, will stay as-is.
Steel pennies are not new, though. They were produced temporarily during World War II to free up the other metals for the war effort.