Rising food costs, gas prices raise inflation fears

The January Consumer Price Index jumped 0.4 percent, or 4.3 percent on an annualized basis. Both food and fuel prices rose 0.7 percent in January, the Bureau of Labor Statistics reported from data gathered long before seasonal increases in demand for motor fuels and before wholesale prices for new food orders show huge increases coming at the checkout counters.

Prices for food and fuel in Minnesota had been somewhat steady for most of the past month as the holiday season gave way to more modest household spending. But that is changing fast, says Rich Horvath, owner of Richard's Market in Maplewood and a watcher of commodity and food markets for more than 30 years.

Wholesale price lists for restocking his neighborhood grocery and meat market show about a 10 percent jump in the past week to two weeks. A bakery supplier sent Horvath a notice on Tuesday that its prices are jumping along the same lines to absorb the high grain and flour prices.

These increases aren't reflected in today's CPI report. They will be beginning next month, however, as food manufacturers and wholesalers pass along food inflation costs that retailers won't be able to absorb.

Minnesota 2020 has advocated that people (of appropriate income) look at their tax rebate checks coming this spring as discretionary money to boost the local and state economy. After all, Congress and the Bush Administration intended the rebate program to be a stimulus for the faltering economy. The Minnesota 2020 proposal acknowledged that much of the estimated $800 per household will be needed for basic family purchases.

That is exactly where the money will be going, warns Horvath. Families are already tightening the reins on spending, are falling behind on monthly utility payments, and are about to get hit with even higher gasoline prices when warmer weather returns to Minnesota, he said.

Horvath said the tax rebates won't stimulate the economy. Rather, he said, it will be a "shock absorber" that will help families cope with higher food and energy prices.

"He's absolutely right," said Ben Senauer, an applied economist and co-director of the Food Industry Center at the University of Minnesota. If there is any stimulus to the rebates at all, he said, it would be through the back door by helping keep the economy falling even farther.

Before this election year is over, lawmakers at the state and federal levels are likely to be hit with questions about what they intend to do with food prices, Senauer predicted. It has already started in France.

Let's take a closer look at what is happening at the gas pumps and on the store shelves.

Senauer said food prices rose about 5 percent in 2007, or double the annual rate of previous yeas going back into the 1990s. Now, economic forecasters at the U.S. Department of Agriculture expect food prices to rise by at least 5 percent again in 2008.

Grocer Horvath thinks that forecast will be adjusted upwards when wholesale prices and future CPI data are collected. It partly depends on how the data are collected, he said. Prices per package are now going up greatly, while manufacturers had already started cutting back the ounces of product they are putting in boxes.

The letter from the bakery supplier said its flour costs have increased by more than 100 percent in the past eight months and the baker couldn't "absorb" those costs any longer. This doesn't surprise Horvath. He's watch spring wheat futures prices climb to nearly $20 a bushel in recent weeks, or nearly four-times the typical price paid for wheat futures in recent years.

"What used to be a dozen cookies in a package may now be only six cookies. The price doesn't seem too bad until you figure out at the end of the month what you've paid for groceries," he said.

Meanwhile, a refinery and oil storage fire in Texas has energy market observers worried that energy prices will begin shooting up before the seasonal rise that always comes in spring. That's when more motorists take to the highways. Any movement upwards is another jolt to the U.S., Minnesota, and household economies.

The American Automobile Association's Daily Fuel Gauge Report for Tuesday, reflecting Monday prices at gas pumps, found the national average price paid for regular motor fuel was $3.03 pr gallon. That was up from $2.26 per gallon a year ago. And the average national price paid for diesel fuel, that powers the trucks delivering food and manufactured goods, was $3.45 per gallon on Monday, up nearly a dollar from the $2.58 per gallon on the same date a year ago.

Closer to home, the Minnesotagasprices.com web site found the average statewide price paid for regular motor fuel on Tuesday was $2.97 per gallon, up from $2.21 a year ago.

The federal tax rebate checks will help defray some of these higher household costs. They won't solve America's or Minnesota's economic problems.

It isn't too early for thoughtful people to ponder what might work to stimulate economies and preserve household budgets should public pressure mount for some remedial action later in the year. Minnesota lawmakers may well be facing a special session.