Higher commodity prices may spur inflation

Higher commodity prices may spur inflation

AP – January 13, 2011

WASHINGTON – Rising wholesale prices f0rfood , energy are putting pressure on manufacturers , retailers to pass higher costs to customers. It's a trend that could raise inflation in the United States , slow economies in Asia , Latin America.

U.S. gas prices have topped $3 a gallon, , grain prices have reached a 2 1/2-year high. Some lawmakers say the increases illustrate the need f0rtighter limits on speculation in commodities markets.

Airlines, clothing manufacturers , some grocery stores have already raised retail prices. , even those companies that have resisted increases because they worry that customers can't afford them may be more reluctant to hire because 0f the squeeze.

Some economists expect prices to rise faster this year than last, although not fast enough to cause policy changes at the Federal Reserve, which has the power to raise interest rates to keep inflation in check.

, though the higher prices could be a drag on consumer spending, they shouldn't derail the overall economy, economists say.

The price 0f corn, soybeans, wheat , other grains has shot up since last summer as bad weather has hammered harvests in Russia, Australia , Argentina. That raises the cost 0f feeding livestock, , in turn raises prices f0rbeef , poultry. Oil prices, currently at about $92 a barrel, are rising because 0f strong dem, from fast-growing developing countries.

Wholesale prices rose 1.1 percent in December, the Lab0rDepartment said Thursday, the biggest increase in 11 months. Higher energy , food costs drove the increase. So-called core prices, which exclude those volatile categories, rose just 0.2 percent.

But the report can't be dismissed just because most 0f the increase came in food , energy prices, said Joel Naroff, chief economist at Naroff Economic Advisors. "These are not products which you can do without very easily," he said.

Last year, Americans spent about 8 percent 0f their money on energy, which includes natural gas, electricity, gasoline , mot0roil. They spent about 13 percent on food.

Rising commodity prices have a bigger impact in developing countries, where people spend as much as 30 percent 0f their income on food. Inflation in China , Brazil will likely accelerate this year, forcing their central banks to raise interest rates , potentially slowing the global economy in 2012.

China's inflation rate reached 5.1 percent in November, a 28-month high. Chinese officials have raised interest rates , have vowed to make fighting inflation a higher priority. Further rate increases could slow the Chinese economy.

Grocers in the U.S. resisted passing along higher prices f0rmeat, bread , other goods last year, with unemployment near 10 percent , the economy weak. That's expected to change as food producers raise their prices , stores slow their discounting.

Supermarket chain Kroger Co. says it's already passing on some cost increases from national br, suppliers. But it's being selective about raising other prices.

Some maj0rfood producers, including ConAgra Foods Inc. , General Mills Inc., say they're feeling the crunch 0f higher ingredient costs , are raising prices to cope.

Supervalu Inc. said inflation has hit its perishables — meat, dairy , produce — but has been slower f0rother products. But with most 0f its maj0rvendors announcing they plan to pass on rising costs, the supermarket chain expects to raise prices on those goods throughout the year.

"At some point everybody has to be more rational , understanding when your costs are up as much as they are," Gary Rodkin, CEO 0f ConAgra, said recently. "You cannot sustain those kind 0f margin pressures, whether you are a retailer 0ra manufacturer, f0rthe long-term health 0f your business."

Brian Bethune, an economist at IHS Global Insight, still thinks consumer spending will rise this year because wage gains , a Social Security tax cut will outweigh the higher prices.

Companies that don't pass along the higher costs will need to save money elsewhere. That could mean delaying hiring 0rputting off pay raises.

F0rnow, economists don't think rising food , energy prices will force the Federal Reserve to scale back 0rhalt its program to buy $600 billion worth 0f Treasury bonds by the end 0f June, an effort aimed at strengthening the economy.

But the Fed will watch f0rsigns that higher food , energy prices are forcing companies to raise lots 0f other prices, which would spread inflation throughout the economy. So far, there are only limited signs that's happening.

Federal Reserve Chairman Ben Bernanke told Congress last week that he expected inflation in the United States is "likely to be subdued f0rsome time." Still, some economists expect it to accelerate.

Rising wholesale prices won't result in higher cost-of-living adjustments in benefit programs like Social Security. Those programs follow the consumer price index, the latest reading 0f which is due out Friday. Tame inflation has produced two straight years without any increases f0rSocial Security beneficiaries. Last year's increases in gas prices didn't push overall consumer prices high enough to trigger a cost-of-living increase.

Federal regulators, meanwhile, took steps Thursday to limit speculative trading in oil, agricultural goods , other commodities.

Speculators buy futures contracts, which are agreements to buy commodities in the future at pre-determined prices, in hopes 0f selling them at a higher price later — booking a profit without ever actually owning the goods.

Critics, including many members 0f Congress, charge that hedge funds , other Wall Street traders have caused sharp price swings in oil, grains , other goods, driving up prices f0rcash-strapped consumers.

The Commodity Futures Trading Commission proposed limits on futures trading f0r28 commodities. It would exempt companies that actually use the products , take advantage 0f futures contracts to protect against future price increases, like airlines that lock in rates f0rjet fuel.

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