High Energy Prices Trickle Down Through the Econom

New York, NY, July 2--What do carpet, tires and paint have in common? They are just a few of the household items getting more expensive because of the high cost of oil and natural gas, important raw materials for these products and the source of energy needed to manufacture and ship them. The price increases for such goods aren't ubiquitous and are relatively small compared with the 30 percent rise in the price of gasoline from a year ago. Yet they illustrate how higher energy costs trickle through less obvious corners of the economy at a time when Wall Street and the Federal Reserve are looking out for signs of inflation. Builders Carpet Outlet of Ann Arbor, Mich., recently began selling brand-name nylon carpeting for about $1, or 4 percent, more per square yard, reflecting wholesale price increases imposed by major manufacturers such as Shaw Industries Inc. and Mohawk Industries Inc. The Goodyear Tire and Rubber Co. and Cooper Tire & Rubber Co. have each raised prices twice this year because synthetic rubber is made from chemicals derived from oil. Each $1-per-barrel increase in the price of oil costs Goodyear an extra $20 million per year, spokeswoman Tricia Ingraham said, adding that the company's two single-digit percentage price increases are "sticking." Paint manufacturer Sherwin Williams Co. of Cleveland framed the impact of rising energy prices this way: For every 10 percent increase, the raw material costs for a gallon of paint go up more than 1 percent. That nudges up the retail price, spokesman Bob Wells said. "We are starting to see more and more of this rippling downstream," said Kevin Swift, chief economist for the American Chemistry Council, an Arlington, Va.-based trade group whose membership includes the largest producers of plastics, coatings, fertilizer and other petroleum-based products. The producer price index for finished goods--a measurement of wholesale prices--increased 0.8 percent in May, the biggest jump since March 2003, the Labor Department reported in June. And rising prices for a cross-section of consumer goods and services, from milk to lumber to document shipping, have raised concerns about creeping inflation. In an effort to head off inflation, the Federal Reserve on Wednesday raised its key short-term interest 0.25 percentage point. "Tom Brokaw has an item on every night about the cost of gasoline, but I think that's the tip of the iceberg," said Norman Davis, director of global energy purchases for International Paper Co., the world's largest forest products company and a large consumer of fuel oil, used to run its plants. "I think people are so focused on the price of gasoline that they don't see the other stuff." Until recently, makers of petrochemicals, plastics and other raw materials had difficulty passing along higher costs to customers such as home furnishings, auto parts and electronic gadget manufacturers. But as the economy strengthens and energy prices remain stubbornly high, the ability to share the cost burden with others grows. Marshal Cohen, a senior retail analyst at NPD Group Inc., a market research company in Port Washington, N.Y., expects higher energy costs to reverberate through "the price of everything from socks to hats" by next fall. He anticipates apparel made with nylon and other synthetic materials to be most affected. Chemical-maker DuPont recently raised the price of a resin used to make packaging and adhesives, a move spokeswoman Heide Rowan attributed to increased demand and higher prices for two raw materials: ethylene, derived from natural gas; and naphtha, derived from oil. Similarly, Solutia Inc. of St. Louis has cited higher energy costs in announcing price increases for several of its petroleum-based products, including nylon carpet fiber. Mohawk Industries, which produces carpet, ceramic tiles and other synthetic flooring materials, has raised prices on many products more than once this year and added a fuel surcharge on deliveries, said Monte Thornton, president of the Calhoun, Ga., company's carpet division. Gregory Reive, sales manager at Builders Carpet Outlet, said the store raised prices for nylon-based carpeting in February and again in May. The carpet retailer has also introduced a $25 delivery charge to cover higher transportation costs. "We don't hide it, either," Reive said. "We let people know what's going on." Whether the rising expense of chemicals, plastics and other raw materials will damage the economic recovery is a matter of debate. Manufacturers' ability to begin raising prices suggests they may be able to defend themselves, so long as demand remains strong. But executives say the impact on them could worsen if the price of oil, which traded as high as $42.33 per barrel last month, and natural gas, which is steadily trading above $6 per 1,000 cubic feet, remain at today's levels for much longer. Some plants could be forced to shut down and more jobs might move overseas, Swift said. Lehman Bros. said in a recent report that there is only limited evidence of pricing power for the chemicals sector and that, despite steadily rising demand, energy costs will continue to crimp the industry's profit margins at least through the third quarter. But many economists, including Fed Chairman Alan Greenspan, have been sanguine about America's ability to absorb higher energy costs without dire consequences, citing improvements in fuel efficiency and the dwindling importance of manufacturing in an economy now dominated by the service sector. Moreover, petroleum-based chemicals and materials, and the products made with them, are not more expensive across the board, executives said. That is because U.S. manufacturers must compete with rivals making goods less expensively abroad, and retailers must be cautious about choking off demand.

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