Inflation makes comeback as prices rise for food, fuel

Inflation is making a quick comeback after touching the lowest levels in decades last fall.

Fast-rising prices for food, fuel and other basic necessities, stoked by rapid growth in emerging countries, are coming home to American consumers despite reluctance by U.S. businesses to raise their prices.

A report from the Labor Department on Thursday showed consumer prices rose by 0.4 percent in each of the past two months — or a 4 percent annual rate over the last quarter f fed by the biggest gains in food prices in two years and surging energy prices.

The report also showed a broadening of price pressures as airlines jacked up their fares by an average of 2.2 percent to pass on the cost of higher fuel and retailers raised clothing prices by 1 percent to reflect the higher costs of cotton and other fabrics.

While the 0.7 percent rise in the cost of food at home last month was not as dire as an 18 percent surge in food prices that helped send people into the streets in Egypt and other Middle Eastern countries, it poses a growing burden for U.S. consumers who are already contending with the highest gasoline prices ever seen at this time of year.

“The surge in commodity prices is starting to feed through to the consumer,” said Harm Bandholz, an economist at Unicredit Markets. He predicted that prices will keep accelerating in coming months and nearly double the inflation rate to 2.75 percent by the middle of the year on the rising tide of commodity inflation.

While economists had expected the surge in basic materials prices that started overseas to eventually reach U.S. shores, Mr. Bandholz said he was surprised at how quickly this prompted U.S. businesses to start passing on their costs to consumers.

The so-called core rate of inflation, which excludes food and energy prices and includes things such as rent that usually rise slowly, accelerated from an all-time low annual rate of 0.6 percent in October to 1 percent in January.

That swift move was startling to Mr. Bandholz, who called it “remarkable” even though “the level of the core rate is still very low.”

“Moreover, the increase was broad-based,” he said, including increases in prices for nearly everything but cars and trucks.

“It’s too early to panic about inflation,” said Nigel Gault, chief U.S. economist at IHS Global Insight, but “we are now seeing some cost increases making it all the way through the pipeline to the final purchaser.”

“The question is whether we are seeing a limited pass-through of commodity price hikes or the beginnings of an inflationary spiral,” he said.

“Wages will be the thing to watch” because inflation can pick up in a major way only if consumers and workers have the wherewithal to keep buying at higher prices. So far, wage gains remain limited at little more than 1.5 percent a year for average workers, with few signs of acceleration.

“There won’t be an inflationary spiral unless wage inflation picks up,” Mr. Gault said.

Like other economists, Mr. Gault noted that the price pressures are arising largely from outside the country.

“U.S. inflation isn’t homemade,” he said. “It’s being driven by rising world commodity prices, in turn driven by rapid growth in emerging markets.”

Still, the jump in food prices is due to get nastier before it improves, he said. “There’s plenty more bad news on the way on the food front this month, as freezing weather has caused a spike in produce prices.”

This will “squeeze consumer pocketbooks” and cause consumers to cut back on their overall purchases to make way for higher-priced necessities, he said.

Higher energy prices also are looming, since the average price of $3.15 a gallon for gas last month already has been surpassed this month with prices averaging $3.19 so far, said Sam Bullard, an economist at Wells Fargo Securities.

But he said the economy and wage gains are still too weak for inflation to take root.

“Given the significant amount of slack in the U.S. economy, inflation is not likely to become a problem in 2011,” he said.

“Businesses have found it very difficult to pass along higher input costs.”

However, “that dynamic could change” if economic growth accelerates as expected this year, he said.

“As the economy picks up steam, companies should find themselves in better position to pass along these increased costs.”

Mr. Bullard expects the overall annual inflation rate to rise from 1.6 percent at the beginning of the year to 2.4 percent by the end of the year.

The unexpectedly quick return of price pressures after a long period of quiescent and declining inflation during the Great Recession will put pressure on the Federal Reserve to end its easy money policies. Some economists and legislators blame the central bank for the uptick in global prices since last fall.

Some Fed official have expressed unease about the rapid rise in prices for globally traded commodities, many of which are approaching the record levels they attained in 2008, when hoarding and shortages of fuel and food emerged in some countries.

Minutes from the last meeting of the Fed’s rate-setting committee said that some officials were worried that inflation could come back with a vengeance if businesses that held back on raising prices for a long time during the recession suddenly found they had pricing power and decided to make up for lost ground by jacking up prices in one fell swoop.