'Tame' Inflation Cheers Investors, Not Consumers

Jeff Cox

You call that tame inflation?

While investors cheered Friday's relatively benign report on wholesale prices in September, consumers might not find much to be happy about.

Michael Probst

That's because "core" producer prices--which leave out the volatile food and energy sectors--inched up only 0.2% last month. But the overall rate, which includes food and energy, jumped 1.1%.

Wall Street tends to pay attention only to the "core" rate because it's less subject to seasonal ups and downs. But since Americans like to eat and drive their cars, those two activities are costing a lot more these days.

And that's not even the bad news. Many experts predict that this is just the beginning of what may be an extended period of higher living costs.

“We’re probably in Year One of what we think is going to be a 20-year bull market for agriculture prices and food prices,” said Christopher Wyke, product manager for commodities and agriculture at Schroder’s.

Oil Hits Record

And with oil prices hitting another record high on Friday--and many predicting $100 a barrel oil soon--energy prices are likely to follow food in making a bigger dent in your wallet.

Patrons line up for fuel, Tuesday, May 30, 2006, in Cincinnati. Oil prices rose above $72 a barrel Tuesday ahead of an OPEC meeting in Venezuela and the start of the Atlantic hurricane season later this week. The Memorial Day holiday marked the beginning of the peak driving season in the U.S., a period when energy traders are extra skittish about any loss of oil production or refining capacity. (AP Photo/Al Behrman)

Much of the rise in food prices can be blamed on ethanol. The rising popularity of the alternative fuel, which is made from corn, has pushed corn prices to record levels this year. And since corn is a major ingredient in many food products, and is used to feed livestock, that's pushed up the prices at the supermarket.

Steak cost an average $5.52 a pound in August, near its 2007 high and the highest price since August 2004, according to government statistics. 

Chicken breasts cost an average $2.33 a pound in August, up about 9% since January. And a dozen eggs cost $1.63, up 24% from a year ago.

Rising milk prices have also been a big story in the U.S. agriculture market, though the price for a gallon of whole milk remained steady at $3.87 in September and is likely to begin trending downward after a significant spike this year, according to Ken Bailey, who studies dairy trends at Penn State University.

“We’ve definitely flatlined,” Bailey said. “We’re expecting it continue to go down throughout 2008.”

Other goods probably won’t follow suit, though.

Weak Dollar a Factor

Darin Newsom, an analyst at Omaha-Neb. based DTN consultants, expects continuing weakness in the dollar as well as global shortages of wheat and the corn situation to continue to boost prices.

“It certainly looks like in the next two to three quarters at least we’re going to continue to see commodity prices go up,” he said. “What we pay at the counter is going to go up as well.”

As for gas prices, troubles at refineries and continuing growth in crude prices pushed the nationwide average to $2.81 a gallon in September. The average has dropped 5 cents in October.

Still, the economy overall is likely to feel little effect from the higher prices

Steven Wieting, director of economic and market analysis at Citigroup, said in a research note that consumer spending in the fourth quarter isn’t likely to drop off after what he considered an expected upward trend in September of food and fuel costs.

That view was echoed by David Parsley, of the Owen Graduate School of Management at Vanderbilt University, who predicts the slowing economy will tame consumer prices.

“If the economy was booming then we would probably see a more rapid transition into inflation,” Parsley said. “As the economy slows down it’s not as easy to raise prices.”