Wholesale Food Prices Rising At Fastest Pace Since 1974

The so-called "core" inflation rate at the producer, or wholesale level, is pretty tame, but it excludes the costs of food and energy. But what consumer can exclude food and energy costs from their budget?

In fact, inflation at the wholesale level is pretty significant, with the U.S. Labor Department reporting its Producer Price Index (PPI)  for February rose 1.6 percent, the biggest increase since June 2009.

Food and gasoline

The increase was led by big jumps in food and gasoline prices. The price of energy was up 3.3 percent, the fifth straight monthly increase. Food prices rose even faster, up 3.9 percent.

These are price increases manufacturers pay. Normally, producers tend to pass those price increases along to consumers, though in the sluggish economy, many have been slow to do so, for competitive reasons. As a result, they have absorbed the costs by cutting back in other areas, including hiring.

When you factor in crude foodstuff and feedstuff to food costs to producers, food prices rose at the fastest rate since 1974, when the U.S. economy was in the grips of what was known as "stagflation." Prices were rising rapidly despite little or no growth in the economy.

Appearances can be deceiving

When stripping out all food and energy costs from the February numbers, the inflation rate at the producer level appears quite tame, 0.2 percent. The biggest increase in the core was for new cars, which rose 0.6 percent.

The PPI for total trade industries gained 1.5 percent last month, the first time that category has shown a gain since October 2010. That categories measures changes in margins received by wholesalers and retailers. The biggest increase came in the margins received by drug stores.

Housing

In a separate report, home construction accelerated its decline, recording the steepest drop in the last 27 years. At the same time, the issuance of new building permits hit a record low.

While on the face of it, that report suggests grim news, housing industry analysts say a decline in new construction may be necessary for the real estate market to absorb the inventory of existing homes on the market. They say the swollen inventory of the last two years is one of the factors depressing home prices.