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No Inflation? Grocery Stores, Gas Prices Tell Different Story

From grocery stores to gas stations and most other consumer stops in between, price inflation is shaping up to be the biggest economic story ahead.

Whether it's how much you'll pay for home heating oil or a loaf of bread, don't believe the non-hype: Even if traditional measures of consumer prices aren't yet showing major increases, consumers know what they see.

"It's not good news from a whole variety of perspectives," says Nicholas Colas, chief investment strategist at BNY ConvergEx in New York. "Food inflation is getting very bad and that's just bad news for the majority of consumers who are still stretched. It's bad news for the 42 million people who are on food stamps."

Price inflation is coming primarily from upward global pressure on commodities like the multiple grains that go into food production as well as heating oil and gasoline that power the world's growing economies.

It's also being driven by a weak dollar, which has continued to fall in value as the Federal Reserve has printed more and more money to pay for programs it hopes will stimulate growth.

But while unemployment remains stuck at 9.6 percentand the housing market is still near its recession lows, consumers are about to get smacked with a barrage of higher prices.

The impact is amplified because wages remain mostly stagnant, though a wage increase would make total inflation pressure as measured through more conventional governmental metrics even worse.

Colas saw it on a small scale when he recently bought a candy bar at his office's vending machine and noticed a 10-cent increase, but that's only the beginning.

"It's a headwind" for the economic recovery, he says. "Near-term, really strong inflation is going to be in a horse race in terms of the Fed's strategy to reinvigorate the economy and increasing prices that will hurt consumer confidence."

So even if measures like the Consumer Price Index and the tally of food prices from the Bureau of Labor Statistics don't outwardly show inflation yet, it won't be long.

General Mills recently said a quarter of its cereal brands will see single-digit price increases soon, and Kraft Foods plans to hike prices on about half of its products. McDonald's , Nestle and Unilever are among those expected to follow suit.

And a new survey from MKM Partners shows prices at Wal-Mart , the world's largest retailer, have risen 0.6 percent in just the last two months.

In the meantime, regular unleaded gasoline is now $2.88 a gallonnationwide, up 6 cents in just the past week and about a quarter over the past two months—and an even longer way from the sub-$2 level of March 2009.

"For most of the year food price inflation has really been pretty tame. But there are indications that inflation is going to be on the rise for the next six to nine months," says Ephraim Leibtag, senior economist at the Department of Agriculture's Economic Research Service. "There's a bigger concern that with an improved economy that prices are going to rise even more."

To be sure, shoppers won't be paying more for everything as the upcoming holiday season is expected to show price discounts for goods such as clothing and technology. But for everyday consumer staples like food and energy, the news is not good.

Economic improvements are coming not so much in the US as they are from developing and developed economies around the globe, where consumers are demanding more of the materials used to produce food and speculators are trying to cash in on price gains in those commodities.

Indeed, the surge in commoditieshas been parabolic.

The Standard & Poor's GSCI agricultural commodities indexis up 25 percent for the year and 16 percent in the last quarter alone. Among the big gainers: cotton (90 percent for the year), coffee (45 percent) and Kansas wheat (31 percent). Sugar's price has zoomed 26 percent in the fourth quarter, while corn, which is used to make so many other products, is up 20 percent for the year.

Yet BLS data show moves only in select areas when it comes to what consumers see on their grocer's shelves.

A loaf of bread, for instance, cost $1.38 in September, up just 2 cents since January. Ground beef also was up only a few cents, to $2.30 a pound, while eggs actually fell 3 cents to $1.75 a dozen.

On the other hand, butter was the big gainer, jumping to $3.57 a pound, a 29 percent increase for 2010. Coffee rose 36 cents a pound to $4.17, a 9.5 percent gain, while pork chops jumped a quarter a pound to $3.34, an 8 percent increase.

Leibtag confirmed it would be dairy and beef where consumers would get hit hardest, while things that aren't consumed directly but are used to make other products will take longer to have an impact.

"Our forecast for right now is that beef and pork products specifically will be on the higher end of the range," he says. "There are going to be impacts down the road as well for cereals and grains. It just takes longer to get through the system."

Energy to Soar, Fed Not Helping

Energy is another story, and one that doesn't get any better for consumers.

Crude oil had been trading in a $70 to $80 a barrel range for much the year but seems to have made a sustained break higher.

Oil likely is on its way to $100 a barrel in the coming months, making home heating costs likely to jump as well, says Todd Horwitz, chief strategist for the Adam Mesh Trading Group in New York.

"This has the chance to get ugly," he says. "You've got commodities across the globe exploding like you have not seen before."

Monetary policy also isn't helping.

The Federal Reserve's various quantitative easing (QE) mechanisms to grow the economy—the latest round (QE2) will involve the purchase of another $600 billion in Treasurys—are helping to weaken the dollar and drive up inflation expectations.

"Does QE2 help middle America? No, it just makes everything more expensive for middle America," banking analyst Meredith Whitney said in a CNBC interview Thursday. "I think that is a complicated policy and a dangerous policy to take things that much further."

The good news? Analysts have upgraded revenue expectations for companies that benefit from higher commodity costs, such as farm equipment manufacturers, miners and large multinationals, despite the expected slow growth of the US economy.

"[I]t does seem clear that weak/dollar commodity inflation is beginning to seep into analysts' expectations," Colas, of ConvergEx, wrote in a note to clients. "It took some time—the dollar has been weakening much of the year—but analysts have clearly caught on and begun to model the current state of affairs into loftier revenue targets for the next few quarters."

Gains for big business likely will come as cold comfort for Americans under the weight of price pressures.

"Higher global food prices in particular will put further upward pressure on headline inflation in many economies in the coming months, particularly the US and those emerging economies where food has a high weight in the consumer price basket," Julian Jessop, chief international economist at Capital Economics in London, wrote in a research note.

"This does not necessarily mean that the Fed has made a mistake and is about to set off an inflationary spiral...But the hit on the real income of consumers is another reason to expect the economic recovery to disappoint."

  • Follow Jeff Cox on Twitter @JeffCoxCNBCcom.
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