On Tuesday, the Federal Reserve rejected the notion that rising food and energy prices heralded sustained inflation, and declared that the U.S. economic recovery is on a "firmer footing." Now we have some numbers to help us evaluate the Fed's claim.
The Producer Price Index, which measures prices for wholesale goods, rose by 1.6 percent in February--the biggest increase in almost two years, according to the Labor Department. But inflation would have been relatively mild had it not been for high energy costs and the biggest increase in food prices in 36 years.
What explains high energy and food prices? Gas prices, the Associated Press explains, have risen because of growing demand for oil in emerging economies like China and India and because of the recent unrest in the Arab world. But energy costs may temporarily decline as Japan, which is a major oil consumer, struggles to recover from its recent earthquake. Food costs, meanwhile, are rising because bad weather has damaged crops in Australia, Russia, and South America and because corn, which can be used for ethanol, is in higher demand. Vegetable prices in particular have risen sharply.
In another sign of where the U.S. economic recovery stands, the Commerce Department announced that home construction in February experienced its biggest decline in 27 years while building permits plunged to a record low. The news, Reuters says, suggests that the real estate sector hasn't yet recovered from the recent housing crisis. Even though interest rates are super-low, Reuters explains, unsold inventory, foreclosures and an unstable job market--which discourages people from buying homes--are conspiring against a rebound in real estate.