If grocery bills seem higher, you’re not imagining things. Thanks mostly to a sharp increase in fuel prices, the cost of food rose faster in February than in any month since November 1974 — not coincidentally, during a previous energy crisis:
Wholesale prices jumped last month by the most in nearly two years due to higher energy costs and the steepest rise in food prices in 36 years. Excluding those volatile categories, inflation was tame.
The Labor Department said Wednesday that the Producer Price Index rose a seasonally adjusted 1.6 percent in February — double the 0.8 percent rise in the previous month. Outside of food and energy costs, the core index ticked up 0.2 percent, less than January’s 0.5 percent rise.
Food prices soared 3.9 percent last month, the biggest gain since November 1974. Most of that increase was due to a sharp rise in vegetable costs, which increased nearly 50 percent. That was the most in almost a year. Meat and dairy products also rose.
Energy prices rose 3.3 percent last month, led by a 3.7 percent increase in gasoline costs.
The good news is that the price of oil has declined after the disaster in Japan, going down to $97 a barrel. However, with Japan’s nuclear reactors under scrutiny and the crisis ongoing at their Fukushima Daiichi plant, Japan will need to boost its other sources of electricity. Nuclear power accounts for more than a third of it now. Japan will have to import raw materials for other sources to boost production, and whether that means oil itself or coal, increased transportation demand will eventually mean higher prices even while Japan recovers from the destruction.
Reuters reports that the price increase surprised economists, and it’s not the first time either:
[The overall rise in wholesale prices] was more than double economists’ expectations for a 0.7 percent rise last month. In the 12 months to February, producer prices increased 5.6 percent, the biggest rise since March, after advancing 3.6 percent in January.
The report came a day after the Federal Reserve said it expected the upward inflation pressure from energy and other commodities to prove transitory but that it would keep a close eye on inflation and inflation expectations.
Economists said given the huge amount of slack in the economy, they did not expect the strong producer prices to pass through to consumers any time soon.
The Federal Reserve has been on a media campaign to sell its monetary policy to average Americans, but this hasn’t always gone smoothly. Witness last week’s visit to Queens, New York, by New York Fed President William Dudley, who got a street-corner education in the cost of living.
The former Goldman Sachs chief economist gave a speech explaining the economy’s progress and the Fed’s successes, but come question time the main thing the crowd wanted to know was why they’re paying so much more for food and gas. Keep in mind the Fed doesn’t think food and gas prices matter to its policy calculations because they aren’t part of “core” inflation.
So Mr. Dudley tried to explain that other prices are falling. “Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful,” he said. “You have to look at the prices of all things.”
Reuters reports that this “prompted guffaws and widespread murmuring from the audience,” with someone quipping, “I can’t eat an iPad.” Another attendee asked, “When was the last time, sir, that you went grocery shopping?”
Scott cleverly titles his post, “Let them eat iPads.” I’m not sure I’d draw a line between QE2 and what has happened in food and oil prices, at least not as a primary factor. The effect of QE2 will be to weaken the dollar, which will hike the cost of imports, to be sure, and that may account for a little of the large price jump. If it was the main factor — if the dollar had been weakened to that extent — then prices would be up across the board, especially on imports. At least according to today’s report from the BEA on the trade deficit, that doesn’t appear to be the case.
The real source of this problem is America’s continuing refusal to exploit its own energy sources. We remain too dependent on imports for energy while deliberately sidelining at least hundreds of thousands of potential high-paying jobs by refusing to extract our own oil and natural gas. When the unstable countries that produce oil go through political paroxysms, it spooks investors and sends commodity prices soaring on the increased risk to distribution. Those price increases mean higher transportation costs, which impacts all goods and services that require transport to get to consumers. It’s a multiplier factor that we have seen a number of times over the last four decades, and which our political class continues to pretend doesn’t exist.
So, imagine my dismay when I read an article by Sudeep Reddy in today’s Wall Street Journal criticizing the fact that I mentioned inflation in my comments about QE2 in a speech this morning before a trade-association. Here’s what I said: “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.”
Mr. Reddy takes aim at this. He writes: “Grocery prices haven’t risen all that significantly, in fact.” Really? That’s odd, because just last Thursday, November 4, I read an article in Mr. Reddy’s own Wall Street Journal titled “Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies.”
The article noted that “an inflationary tide is beginning to ripple through America’s supermarkets and restaurants…Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months.”
I wonder what Sudeep Reddy thinks now?