Huge increases in US food prices over the past few months are not only putting a strain on consumer's pocketbooks, but they may also make the Federal Reserve's fight to curb inflation more difficult.
For the first four months of this year, the prices consumers paid for food and beverages advanced at a seasonally adjusted annual rate of 6.7 percent, compared to a gain of just 2.1 percent for all of last year, according to Labour Department data.
Given growing demand for corn for use in ethanol production, shrinking stockpiles of grains, and rising demand for food fuelled by economic growth in the developing world, the trend of rising food prices is likely to continue.
Food makes up about 15 percent of the US consumer's spending. The US Agriculture Department's latest supply and demand estimates showed that world stockpiles of grains are expected to drop to levels not seen since the 1970s.
"The problem is not just falling supply, as unusual and uncomfortable as that may be. Demand for corn for ethanol production is taking down inventories at a faster pace than anticipated, and some wheat fields are being turned into cornfields to take advantage of this," said Carl Weinberg, chief economist at High Frequency Economics in Vahalla, NY.
Grain prices are particularly important in the food chain because they are used for feedstocks for animals and therefore higher prices will ultimately work their way up the food chain. Consumers are also paying more for imported foods, which have surged in price by nearly 8.0 percent over the last year.
"We think that it is only a matter of time before these higher import prices push up core goods prices in the (Consumer Price Index)," Bear Stearns economists wrote in research commentary.
Typically the Federal Reserve focuses on "core inflation", excluding food and energy prices, because seasonal factors make food and energy prices volatile.
For the first four months of this year, the overall CPI has advanced by a seasonally adjusted 4.8 percent annual rate, whereas the core CPI, excluding food and energy, has advanced by only 2.2 percent. But economists now warn that policy makers cannot ignore overall inflation measures that include food and energy prices.
"This will feed over to some extent in core inflation in that these are costs that are passed on," warned Dean Baker, co-director of the Center for Economic and Policy Research in Washington. Meanwhile, higher food prices have absorbed the lion's share of any raise in the US consumer's wages.
According to the government's latest data, food and beverage prices were up 3.8 percent on a year-over-year basis while average hourly earnings were up by the same amount. "That does affect purchasing power," said Bernard Baumohl, managing director at the Economic Outlook Group in Princeton Junction, N.J. However, unlike spending on gasoline, consumers can make some adjustments to accommodate rising food prices.
For example, they can cut back on eating outside the home or they can switch brands and products, said Christian Weller, chief economist at the Washington-based Center for American Progress. "Gasoline is a much bigger issue because you have a captive audience here. If gas prices go up you still have to go to work," Weller said.
Federal Reserve Governor Frederic Mishkin in a recent paper highlighted concerns that gasoline price increases are already spreading into other areas.
"These price increases have boosted the cost of producing many non-energy goods and services, and as firms gradually pass on these higher costs to their customers, monthly readings on the change in core prices are likely to be higher than they otherwise would be," he said.
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