Price Pressure Building At Wholesale Level

There's more evidence that price pressures are building at the producer level, though, besides food and energy, few have broken through to the consumer level.

The U.S. Government reports the Producer Price Index (PPI), a measure of prices at the wholesale or producer level, rose 0.8 percent in January. The cost of finished consumer goods -- excluding food and energy -- rose by the same amount.

Economist Joel Naroff, of Naroff Economic Advisors, in Holland, Pa., says while retail costs have remain constrained, it's a different story for producer prices.

"Costs are rising and they are doing so on a very broad based manner," Naroff said.

Up more than expected

The PPI jumped in January even more than expected given the rise in energy costs.  Food costs rose, but less rapidly than they had been as some of the pork, poultry, dairy and egg increases unwound a bit. 

"What is worrisome is the accelerating increases in non-energy and non-food prices," Naroff said.

Finished consumer goods -- excluding food and energy -- surged, with the trend over the past few months moving higher.  A year ago when you looked at the details, it was hard to find many categories where wholesale prices were rising very much at all.  Most were actually declining.  Now, says Naroff, the opposite is the case.

"Wholesale cost pressures are building and it is not clear how long the dam can hold," Naroff said.

U.S. consumers may be spared

Americans aren't the only ones seeing higher prices, especially for food. In many developing nations, food costs have skyrocketed as demand for certain food commodities has increased. But some economists think the impact in the U.S. will be significantly less pronounced.

"While global increases in food and feed commodities have been high, they won't translate into a major increase in U.S. consumer prices," said Harry Kaiser, Professor of Applied Economics at Cornell University. "Soaring commodity prices do not translate into a soaring Consumer Price Index for food because commodities such as wheat make up only a fraction of the retail price. There is more cost for gasoline than wheat in a loaf of bread."

Kaiser predicts retail prices for commodities that do not require as much transformation from the farm to the consumer - such as milk, eggs and meat - will increase more than foods that require more processing, such as bread.

"Recent food price increases are not due to recent actions by the Federal Reserve or current fiscal policies by the U.S. and other countries," Kaiser said. "The increases in prices for commodities such as corn and wheat are primarily due to poor or extreme weather events in major food supply regions, continued demand increases in China and India, and the demand for biofuels which use crops such as corn."

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