Equipment prices that soared early in 2004 are not a signal of high inflation. Instead, the sharp price increases of the year's first half are best understood in the context of the broader economy.

For several years through last January, world economic growth was below its long-term trend and the industrial and capital industries were even weaker. Overall inflation fell to a 1% annual pace in the United States at the end of 2003, and was even lower for non-electronic equipment.

Then industrial commodity prices began to rise quickly. Prices for some items doubled in a few months and most buyers experienced at least some availability problems. The largest price rises were for steel, lumber and non-ferrous metals. Overall inflation increased to a 4.5% annual pace in the five months ending in June.

This sudden surge in inflation was the result of stronger worldwide economic growth. Prominent here is the emergence of Japan and Europe from recessions, and much higher capital investment spending in the United States and China. As a result, there was a large, abrupt rise in demand for industrial commodities that temporarily overwhelmed available supplies. Sellers rationed supplies with higher prices.

Prices for non-electronic capital equipment increased 6.2% during the first half. Meanwhile, materials handling equipment prices rose 4.8% between January and June following only a 0.9% climb the previous 12 months. Conveyor prices were up 6%, hoists and cranes 5.4%, and lift trucks 2.4%. Inflation also turned abruptly higher in the same period for related equipment.

That said, inflation began a new phase this summer. Overall, commodities prices stabilized in June and July as supply caught up to demand.

Ahead, persistent strong economic growth means that overall inflation in the United States will ebb to a 2% pace by the end of 2004 and then progressively rise to a 2.5–3.0% pace a year later. Similarly, equipment price inflation will average about 1–1.5% through summer 2005, and then rise to close to 3% by the end of next year.

Materials handling equipment prices will parallel price changes for all capital equipment. Most of the price increases in this expansion cycle have already occurred. Prices will average 4.0% higher this year—more than the previous four years combined—and increase another 2.4% in 2005.