High energy and food prices--and what they signal about inflation--might as well be the theme of the week when it comes to U.S. economic indicators.
On Tuesday, the Federal Reserve declared that rising food and energy prices would not result in sustained inflation. The next day, we learned those very food and energy prices were responsible for wholesale prices rising in February at their fastest rate since mid-2009.
Today the Labor Department has announced that consumer prices in February similarly rose at their fastest pace since mid-2009. The reason? You guessed it--high food and energy prices. Given that we're hit with headlines like these seemingly every day now--and that food and gas represent a sizable portion of what consumers spend money on--should we be concerned? There are three main schools of thought here:
1. Spike Is Temporary Food and gas tend to be volatile. The price of gas, for example, has risen recently because of the uprisings sweeping oil-rich countries in the Middle East and North Africa. That's why economists--including those at the Fed-- often look at "core" or "underlying" inflation, which excludes food and gas prices, when analyzing price trends. And in February, The Wall Street Journal points out," underlying inflation hardly budged. The Fed therefore feels justified in keeping interest rates low and continuing its government bond-buying program, which critics say is increasing inflationary pressures.
2. Spike Is Permanent Food costs are rising for a host of reasons that include the weak U.S. dollar, lower crop production, unrest in the Middle East, high oil prices, interest in crop-based biofuels, violent weather, and demand from developing countries, The Los Angeles Times notes, prompting some economists to wonder whether America's "abundance of affordable food is history." Economists have put forth similar arguments about why high gas prices are here to stay.
3. Spike Could Spark Broader Inflation This theory is a bit of a corollary to #2. If food and energy prices stay high for awhile, The Atlantic's Daniel Indiviglio explains, that could influence the costs of other goods and services, since producers and retailers will feel compelled to increase their prices to contend with more expensive energy. In other words, the underlying inflation that the Fed feels it has under control could spiral out of control. If that turns out to be the case, the Journal says, the Fed may stop pumping money into the economy. But that's assuming the Japanese earthquake and high gas prices don't hobble the U.S. recovery, Indiviglio points out. "If the economy takes a step back," he says, "the central bank could provide even more monetary support."
Whether temporary or permanent, the rise in food and energy prices is certainly stinging consumers. Last week, during a speech defending the Fed's monetary policy in Queens, New York Fed President Bill Dudley mentioned the iPad 2 to explain how some prices are falling. "I can't eat an iPad," one person in the crowd retorted.