With Inflation on the Rise, Is the Era of Cheap Food Over?

The long-feared specter of inflation is finally rearing its ugly head, as consumer prices rose by 0.5 percent in February, according to a report from the Department of Labor.  Take away food and gas prices and the increase was jut 0.2 percent.  “All signs indicate that, against the backdrop of a strengthening economy, inflation is beginning to heat up as well,” said Jim Baird, chief investment strategist of Plante Moran Financial Advisors.  The Department of Agriculture says that food prices could climb three or four percent in 2011.

Although core consumer prices have risen at the slow pace of 1.1 percent over the past year, they’ve also started rising more quickly in the past five months.  The Federal Reserve pays closer attention to the core rate when it determines interest rates and examining whether inflation is under control.  The central bank believes recent price increases are likely to prove temporary.  Critics of the Fed argue its looser-money policies have contributed to the price spikes.  “If core inflation continues to rise, while job growth remains slow and the U.S. expansion is threatened by developments in the Middle East and Japan, then the Fed will be in a very tight spot,” said Ellen Beeson Zentner, senior U.S. macroeconomist at Bank of Tokyo-Mitsubishi.

The lion’s share of the blame for renewed inflation is sharply rising energy prices, which soared 3.4 percent in February alone and represent an 9.8 percent increase over the last three months.  A gallon of gas has risen 50 cents in the first months of 2011, primarily a result of political unrest in countries such as Egypt, Tunisia, Libya and Bahrain.  The cost of food rose 0.6 percent in February and 2.8 percent in the last year, driven largely by global demand.  Prices for corn and wheat have soared to a two-year high; sugar prices have climbed to their highest level in 30 years.  Large-scale crop failures around the world have contributed to the spike.  Because these farm staples are used to feed livestock or are included in many packaged goods, the prices of many grocery items — ranging from chicken to cereal — have risen accordingly.  Housing prices, which constitute approximately 40 percent of the core Consumer Price Index, rose for the fifth consecutive month, by 0.1 percent.

For Americans, the return of inflation could signal the end of the era of inexpensive food. Typically, Americans have spent just 10 percent of their paychecks on food, compared with as much as 70 percent in some countries, particularly in sub-Saharan Africa.  Some economists are wondering if the nation’s cornucopia of affordable food is a thing of the past.  “Food prices have been rising a lot faster, because underlying costs have really shot up. You’re seeing some ingredients up 40 percent, 50 percent, 60 percent over last year,” said Ephraim Leibtag, a U.S. Department of Agriculture economist.  “When you see wheat prices close to 80 percent up, that’s going to ripple out to the public.”

Fierce weather patterns, which some scientists blame on climate change, are making the problem worse.  Unprecedented floods in Australia destroyed much of the wheat crop, while a drought threatened China’s.  “We’re not sure if these extremes in weather are the new normal,” said Clive James, founder of the not-for-profit International Service for the Acquisition of Agri-Biotech Applications.  “But the patterns we’ve seen in the past few years show that this may become more the rule than the exception.”

In nations where people spend 30 to 70 percent or more of their income on food, starvation is on the rise.  The World Bank has reported that as many as 44 million people have been forced into hunger because of rising food prices.  That has helped fuel the conflict in Libya and ousted leaders in Tunisia and Egypt.  “The situation is volatile and we’re at a point of transition,” said Abdolreza Abbassian, a grain economist with the United Nations’ Food and Agriculture Organization.