MIKE

By Richard Blackden
US Business Editor – The Telegraph
5:46PM GMT 16 Mar 2011

The cost of producing finished foods jumped 3.9pc last month from a year earlier, as harsh winter weather exacerbated the already increasing price of many basic ingredients used in food. The increase was the steepest since November 1974.

With oil prices having spiked on the political upheaval in North Africa and the Middle East, energy costs were 3.3pc higher in the month, according to a report on producer prices from the Labor Department.

Ben Bernanke, chairman of the Federal Reserve, insists these sharp rises in costs will prove transitory and will not spiral into a broader price increases across the economy. Core producer prices, which strip out food and energy, climbed just 0.2pc in the month and were down from January’s level.

However, analysts pointed out the threat to a quickening recovery should food and energy prices head further north. “Higher costs are both squeezing profit margins and consumers’ spending power,” said Nigel Gault, an economist at IHS Global Insight.

The economy suffered a further blow with new data showing better times for the country’s housing market appear no nearer. New home construction plunged 22.5pc in February to an annual rate of 479,000, the Commerce Department said yesterday.

The number of applications for building permits, seen as good indicator of the future health of the housing market, tumbled 8.2pc in the month. While analysts cautioned that the heavy snow seen in many parts of the US will have played a role, this offered little comfort.

“The across-the-board declines in building permits leaves a fundamentally weak report,” said Steven Weiting, an economist at Citigroup in New York. “Both the most stable and timely data show no improvement.”

The squeeze of rising costs and a still depressed housing market will worry policy makers at the Fed, which on Tuesday left interest rates at a record low level. The last four months have seen an improvement in the world’s largest economy, prompting the central bank to tell investors that the recovery is now on a “firmer footing”.

Unlike the Bank of England, the Fed is not facing the same pressure to increase interest rates that were slashed to combat the financial crisis – a move that is likely to jeopardise the recovery’s momentum.

However, that will change if the higher food and energy prices seen in yesterday’s report are beginning to spread across the economy. The latest consumer price inflation figures are due for release today.

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