MIKE

Posts Tagged ‘Food Inflation’

Kevin Kerr
Money and Markets
Wednesday, June 22, 2011 at 7:30 am

For a very long time in America we’ve enjoyed a seemingly endless, cheap, and abundant variety of foods from all over the globe.

Although for many of us, our understanding of food supply and what it takes to get it all on the grocery store shelves is very limited. Somehow, it just magically appears!

The problem: Like so many of our other natural resources, we have simply taken for granted the costs associated with producing, harvesting, packaging, and shipping the items we have come to expect at the market each day.

But with fuel prices and other costs surging, we are seeing …

The End of Cheap Food

Today, in emerging markets such as India and China, there is exponential growth and a new middle class that is demanding things they’ve never had before. Millions of cars, better housing, electronics, and above all … better foods.

Demand has surged for things like meats, better quality grains, soft commodities including coffee, cocoa, and sugar. This huge increase in demand is rapidly outstripping supplies of many key resources, and putting a strain on an already overloaded agriculture system.

On top of the global surge in demand we are seeing a decline in quality agricultural acreage and arable land in many regions, mainly due to an increase in poor farming methods. In China for example, poor hillside farming techniques are quite common. And antiquated farming equipment is often still the norm.

In addition, much of the once abundant younger rural population has fled the farms for the chance of a better life and increased pay in the larger cities and factories. This migration has left behind an elderly and dying rural population that simply will not be able to sustain the growing food demand.

Meanwhile, China has been racing to secure arable farmland anywhere it can, gobbling up land in South America, Europe, and especially Africa. China has made huge investments in parts of Africa and has secured vast amounts of arable land, mining resources, and even a new built-in workforce. China’s influence is so widespread that many people are now referring to parts of the Dark Continent as Chafrica.

The Chinese leadership realizes the dire situation they face if they don’t secure long-term supply lines for food and other raw materials for their people. The widespread unrest this year in the Middle East in places like Egypt, Tunisia, and Libya, in large part was ignited because of surging food and fuel costs. This is very worrisome to the Chinese leadership, as civil unrest in China could be uncontrollable once ignited.

More Hungry Mouths to Feed

According to the U.S. Census Bureau, the current world population of close to 7 billion is projected to exceed 9 billion by the middle of this century. To put those numbers in perspective, in 1950 there were only 2.5 billion people.

As global population explodes demand for food, fuel and land will increase at a frantic pace as nations work to secure long-term supplies from all corners of the Earth.

High Costs Going Much Higher

Of course higher prices for agricultural products help farmers, but at the end of the day their input costs have soared as well. Costs for things like fertilizer, equipment, irrigation, seed, and most of all, fuel.

Farming is a very energy intensive business, and as diesel and other fuel costs soar those increased prices roll downhill to the consumer in the grocery aisle. And energy costs don’t just impact the growing process … it also significantly increases the cost of packaging and certainly transport.

As food prices climb, along with everything else, those costs are hitting Americans in the wallet — hard. In fact many people are being forced to make extremely difficult choices. Things have gotten so bad right now that we have over 44 million Americans on food stamps, a grim new record high, according to the latest data from the U.S. Department of Agriculture (USDA).

While surging food and gas prices are hitting Americans with a one two punch, those same prices are even more devastating for poor and developing nations, and often can often become a matter of life and death.

This is only expected to get worse …

According to a June 17, Organization for Economic Cooperation and Development Report, “Cereal costs may average 20 percent more and meat 30 percent more over the next decade than in the last one.”

2011 has been a rough year so far, as widespread natural disasters have caused major crop delays and damage around the globe. Flooding in much of the U.S. has virtually wiped out many farmers’ chances of getting any crops in the ground this season. And those who have gotten crops in the ground, risk a very hot, dry summer which may kill corn and other crops that were planted late.

In addition, many farmers are now worried that because they got the crops in late they may risk an early freeze before they can harvest.

Simply put: 2011 is setting up to be a very expensive year for agriculture and potentially a very profitable one for those who are invested in it.

Do I Think Commodities Are in a Bubble? No Way!

Seems these days that everywhere I go, investors and fund managers are concerned about the rising costs of commodities. They’re always asking me if this is a commodities bubble and when it will burst, and when will prices return to the cheap levels we are used to.

My answers are always the same: This is not a bubble, and the chances of prices falling by any significant amount are slim to none.

Even now, we still have the die-hard dollar bulls coming out and claiming that we really don’t have inflation and the commodities markets are simply speculator driven and the worst for the dollar is over. I strongly disagree.

I believe a small move up in the dollar will continue a bit longer as the euro seemingly crumbles because of Greece.

However, longer term I think the same problems that drove the dollar into the ground will persist, and even worsen. The Fed has dug a hole that is too deep to climb out of, no matter how much funny money they decide to print.

Sure, speculation is a part of this picture. But to lay the blame on the farmer’s doorstep or to say it’s all speculators and hedge funds causing the run-up is a sad mistake.

Real physical demand and the weak U.S. dollar policy are two of the biggest reasons. And I don’t see demand for commodities going anywhere but higher longer term.

One thing you can count on is that everything from milk to yogurt and steak to eggs is going up in price — and not just a little, a lot!

That’s why as consumers and investors, we must look for ways to hedge ourselves against those costs we all are facing in the grocery aisle.

By Matt Andrejczak
MarketWatch
June 9, 2011, 4:09 p.m. EDT

The total average cost of 16 items used to prepare one or more meals was $51.17, up $2.10 from the previous survey, with sirlion tip roast, russet potatoes, sliced deli ham and bacon increasing the most in price.

Whole milk was up 16 cents to $3.62 a gallon, while toasted oat cereal cost was up 12 cents to $3.17 for a nine-ounce box, the American Farm Bureau said in its quarterly poll based on 72 shoppers in 30 U.S. states.

Just two of the 16 items surveyed dropped in price: Boneless chicken breasts fell 23 cents to $3.09 a pound. Shredded cheese dropped 7 cents to $4.56 a pound.

U.S. food companies, including Kraft Foods KFT
+0.06% , Kellogg
K
-0.02% and Sara
Lee SLE
-0.11% , have been raising prices to combat a sustained surge in costs to buy
corn, coffee, oats and other staple food ingredients to consumers.

Skyrocketing fuel costs are a recent challenge, fattening the bill food makers pay for freight and storage.

On Thursday, J.M. Smucker SJM
+0.60% , maker of Folgers coffee and Hungry Jack
pancake mix, said its cost of products sold will jump 25% over the next 12 months. Read more on Smucker’s price increases.

“Further retail price increases are likely to be the new normal as we move through 2011, especially for meats,” American Farm Bureau economist John Anderson said in a statement.

Based on first quarter reports, Kraft appeared to be the only major food company that was able to raise its prices enough to cover its commodities tab. Read Kraft tops rival in commodities fight.

Read the entire article HERE.

by Nick Olivari
Reuters
NEW YORK | Fri Apr 29, 2011 4:34pm EDT

By contrast European Central Bank has raised rates, boosting the euro by 11 percent so far this year.

The U.S. dollar index .DXY hit a three-year low of 72.834 on Friday and has now fallen for five straight months, with April posting a 3.8 percent April decline.

“It’s pretty close to a one-way bet (on the dollar), but in foreign exchange markets, anything can happen,” said Chris Turner, head of foreign exchange strategy at ING Commercial Banking in London. “U.S. monetary policy is reflationary policy which is great news for the commodity currencies and frames the weak dollar.”

The euro rose about 4.6 percent against the dollar in April for its best month since September. The dollar fell 2.5 percent this month against the yen, its worst month since December.

On Friday the euro was buoyed by stronger-than-expected euro-zone inflation data that increased the chance of another ECB rate rise. Trading was thinned by a holiday in the U.K. for Britain’s royal wedding.

The euro closed around $1.4816, little changed on the day but still near its highest since early December 2009.

The U.S. Labor Department will publish its April employment report next week, and analysts at Citigroup said dollar bearishness should persist.

“It is hard to be optimistic on the (dollar’s) long-term prospects, given the Fed’s ability to surprise on the dovish side, the ongoing overhang of U.S. dollar assets among reserve managers and the concerns that have emerged on long-term U.S. fiscal prospects,” CitiFX said in a research note.

Overextended speculative positioning suggest the dollar’s decline may slow next week, according to Vassili Serebriakov, currency strategist at Wells Fargo in New York.

“However, with the Fed sending a strong dovish message, we see few significant triggers for an immediate dollar turnaround,” he said.

The Swiss franc was buoyed by upbeat comments from the Swiss National Bank’s chairman and an above-forecast Swiss sentiment survey.

The Swiss franc rose to hit a record high of 0.86256 francs per dollar on EBS. Speculators remained net long the Swiss franc to the tune of 17,841 contracts, according to CFTC data. The euro ended the week down about 1.0 percent at 1.2820 francs.

Against the yen, the dollar was down 0.6 percent at 81.07 yen. The net short yen position dropped by 15,986 contracts to 36,997 from 52,983 the week before, according to CFTC data. Most of the shift was from a decline of 14,858 total short contracts to 51,060 contracts.

Euro resistance was expected around $1.4905, the peak in December 7 2009, with a substantial options barrier at $1.5000. Beyond $1.5000, the key target was the 2009 high of $1.5145, analysts said.

One-month euro/dollar risk reversals last traded at -1.3 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise.

But the same measure traded at -1.48 on Tuesday, which indicates relatively less bearishness, the day before Federal Reserve Chairman Ben Bernanke hosted his first-ever post-policy decision news conference.

Still, euro long positions rose to 68,279 contracts in the latest week, the highest since December, 2007, according to data from the Commodity Futures Trading Commission released on Friday.

(Reporting by Nick Olivari)

Read the entire article HERE.

By Eric Martin
Bloomberg
Apr 16, 2011 4:49 PM PT

World Bank President Robert Zoellick said the global economy is “one shock away” from a crisis in food supplies and prices.

Zoellick estimated 44 million people have fallen into poverty due to rising food prices in the past year, and a 10 percent increase in the food price index would send 10 million more people into poverty. The United Nations FAO Food Price index jumped 25 percent last year, the second-steepest increase since at least 1991, and surged to a record in February.

Food price inflation is “the biggest threat today to the world’s poor,” Zoellick said at a press conference following meetings of the World Bank and the International Monetary Fund. “We are one shock away from a full-blown crisis.”

“For most commodities, stocks are relatively low,” he said. “You have one other weather event in some of these areas and you really take a danger zone and start to push people over the edge.”

Zoellick said he opposes export bans that nations use to depress local commodity prices for their citizens, lifting costs for consumers in other countries.

Farmers in Russia, once the second-biggest wheat exporter, are planting the fewest acres in four years, in part because a government export ban kept prices low, a Bloomberg survey of producers, traders and analysts showed last month. India, the largest grower after China, is mulling lifting an export ban in place since 2007 as harvests may reach a record for a fourth straight year, Agriculture Minister Sharad Pawar said this month.

Economic growth “is leveling off after a post-crisis recovery,” Zoellick said. “The question now is whether it’s strong enough to reduce unemployment, particularly in developed countries. Inflation is up in developing countries, and this could lead to overheating or asset price bubbles.”

Read the entire article HERE.

By Michael Pento
EuroPacific Capital
Monday, April 4, 2011

For years the Federal Reserve has told us that in order to detect inflation in the economy it is important to separate “signal from noise” by focusing on “core” inflation statistics, which exclude changes in food and energy prices. Because food and energy figure so prominently into consumer spending, this maneuver is not without controversy. But the Fed counters the criticism by pointing to the apparent volatility of the broader “headline” inflation figure, which includes food and energy. The Fed tells us that the danger lies in making a monetary policy mistake based on unreliable statistics. Being more stable (they tell us), the core is their preferred guide. Sounds reasonable…but it isn’t.

If it were truly just a question of volatility the Fed may have a point. But for headline inflation to be considered truly volatile, it must be evenly volatile both above and below the core rate of inflation over time. If such were the case, throwing out the high and the low could be a good idea. However, we have found that for more than a decade headline inflation has been consistently higher than core inflation. Once you understand this, it becomes much more plausible to argue that the Fed excludes food and energy not because those prices are volatile, but because they are rising.

If you talk about the grand sweep of Fed policy, it’s fairly easy to fix the onset of our current monetary period with the onset of the dot.com recession of 2000. To prevent the economy from going further into recession at that time, the Fed began cutting interest rates farther and faster than at any other time in our history. During the ensuing 11 years, interest rates have been held consistently below the rate of inflation. Even when the economy was seemingly robust in the mid years of the last decade, monetary policy was widely considered accommodative.

Over that time annual headline Consumer Price Index (CPI) data has been higher than the Core CPI 9 out of 11 years, or 81% of the time. Looking at the data another way, over that time frame, the U.S. dollar has lost 20% of its purchasing power if depreciated year by year using core inflation, and 24% if depreciated annually with headline inflation. The same pattern held during the inflationary period between 1977 thru 1980, when the Fed’s massive money printing sent the headline inflation rate well above the core reading. The empirical evidence is abundantly clear. When the Fed is debasing the dollar, headline inflation rises faster than core. The reason for this is clear. Food and energy prices are closely exposed to commodity prices which have a strong negative correlation to the falling dollar that is created by expansionary policies.

Data we have seen thus far in 2011 underscores the need to focus on headline inflation and to avoid the trap of relying on the relatively benign core. The difference between the core rate and headline rate of inflation was .6 percent in January and a full percentage point in February. If annualized those relatively small monthly disparities will become enormous.

It is shocking how few Americans, even those with economic degrees and press credentials, fully appreciate the Fed’s vested interest in reporting low inflation. With benign data in hand, Fed policy makers are given a free hand in adopting stimulative policies. Central bankers who shower liquidity on the economy earn the gratitude of their peers and the thanks of their political patrons. But once a central bank goes down the expansionary path to fight recession it is much easier to keep pumping money than to reverse course when inflation starts to bite into purchasing power.

The sad truth is that the Fed’s record low interest rates are once again causing food and energy prices to rise much faster than core items. Bernanke is focusing on the core just as we need him to focus on the headline. It’s time for the Fed to stop hiding behind flimsy statistical juggling and to start protecting the value of our dollar, which unfortunately is in free fall no matter what statistics one chooses to use.

Read the original article HERE.

Vice Chair Janet L. Yellen
At the Economic Club of New York
New York, New York
April 11, 2011

Good afternoon. For more than a century, the Economic Club of New York has provided an influential forum for the discussion of social, political and economic challenges facing the nation, and I appreciate very much your inviting me to speak today. My comments will focus on recent increases in commodity prices and the effects of those developments on the outlook for inflation, the economic recovery now under way, and the appropriate stance of monetary policy. Let me emphasize at the outset that these remarks reflect my own views and not those of others in the Federal Reserve System.1

Since early last summer, the prices of oil, agricultural products, and other raw materials have risen significantly. For example, the price of Brent crude oil has risen more than 70 percent and the price of corn has more than doubled; more broadly, the Commodity Research Bureau’s index of non-fuel commodity prices has risen roughly 40 percent. The imprint of these increases has become increasingly visible in overall measures of inflation. For example, inflation as measured by the price index for personal consumption expenditures (PCE) moved up to an annual rate of about 4 percent over the three months ending in February after having averaged less than 1-1/2 percent over the preceding two years. Moreover, survey data suggest that surging prices for gasoline and food have pushed up households’ near-term inflation expectations and are making consumers less confident about their economic circumstances.

Some observers have attributed the recent boom in commodity prices to the highly accommodative stance of U.S. monetary policy, including the marked expansion of the Federal Reserve’s balance sheet and the maintenance of the target federal funds rate at exceptionally low levels. Such an interpretation of recent developments naturally leads to the conclusion that the Federal Open Market Committee (FOMC) should move promptly toward firmer monetary conditions. Indeed, some have even raised the specter of a return to the high inflation of the 1970s in arguing for the urgency of monetary policy tightening.

Increases in energy and food prices are, without doubt, creating significant hardships for many people, both here in the United States and abroad. However, the implications of these increases for how the Federal Reserve should respond in terms of monetary policy must be considered very carefully. In my remarks today, I will make the case that recent developments in commodity prices can be explained largely by rising global demand and disruptions to global supply rather than by Federal Reserve policy. Moreover, empirical analysis suggests that these developments, at least thus far, are unlikely to have persistent effects on consumer inflation or to derail the recovery. Critically, so long as longer-run inflation expectations remain stable, the increases seen thus far in commodity prices and headline consumer inflation are not likely, in my view, to become embedded in the wage and price setting process and therefore are not likely to warrant any substantial shift in the stance of monetary policy. An accommodative monetary policy continues to be appropriate because unemployment remains elevated, and, even now, measures of underlying inflation are somewhat below the levels that FOMC participants judge to be consistent, over the longer run, with our statutory mandate to promote maximum employment and price stability.

While I continue to anticipate a gradual economic recovery in the context of price stability, I do recognize that further large and persistent increases in commodity prices could pose significant risks to both inflation and real activity that could necessitate a policy response. The FOMC is determined to ensure that we never again repeat the experience of the late 1960s and 1970s, when the Federal Reserve did not respond forcefully enough to rising inflation and allowed longer-term inflation expectations to drift upward. Consequently, we are paying close attention to the evolution of inflation and inflation expectations.

Sources of the Recent Rise in Commodity Prices
Let me now turn to a discussion of the sources of the recent increase in commodity prices. In my view, the run-up in the prices of crude oil, food, and other commodities we’ve seen over the past year can best be explained by the fundamentals of global supply and demand rather than by the stance of U.S. monetary policy.

In particular, a rapid pace of expansion of the emerging market economies (EMEs), which played a major role in driving up commodity prices from 2002 to 2008, appears to be the key factor driving the more recent run-up as well. Although real activity in the EMEs slowed appreciably immediately following the financial crisis, those economies resumed expanding briskly by the middle of 2009 after global financial conditions began improving, with China–which has accounted for roughly half of global growth in oil consumption over the past decade–again leading the way. By contrast, demand for commodities by the United States and other developed economies has grown very slowly; for example, in 2010 overall U.S. consumption of crude oil was lower in than in 1999 even though U.S. real gross domestic output (GDP) has risen more than 20 percent since then. On the supply side, heightened concerns about oil production in the Middle East and North Africa have recently put significant upward pressure on oil prices, while droughts in China and Russia and other weather-related supply disruptions have contributed to the jump in global food prices.

In contrast, the arguments linking the run-up in commodity prices to the stance of U.S. monetary policy do not seem to hold up to close scrutiny. In particular, some observers have pointed to dollar depreciation, speculative behavior, and international monetary linkages as key channels through which accommodative U.S. monetary policy might be exacerbating the boom in commodity markets. Let me address each of these possibilities in turn.

First, it does not seem reasonable to attribute much of the rise in commodity prices to movements in the foreign exchange value of the dollar. Since early last summer, the dollar has depreciated about 10 percent against other major currencies, and of that change, my sense is that only a limited portion should be attributed to the Federal Reserve’s initiation of a second round of securities purchases. By comparison, as I noted earlier, crude oil prices have risen more than 70 percent over the same period, and nonfuel commodity prices are up roughly 40 percent. Put another way, commodity prices have risen markedly in all major currencies, not just in terms of U.S. dollars, suggesting that the evolution of the foreign exchange value of the dollar can explain only a small fraction of those increases.

A second potential concern is that U.S. monetary policy is boosting commodity prices by reducing the cost of holding inventories or by fomenting “carry trades” and other forms of speculative behavior. But here, too, the evidence is not compelling. Price increases have been prevalent across a wide range of commodities, even those that are associated with little or no trading in futures markets. Moreover, if speculative transactions were the primary cause of rising commodity prices, we would expect to see mounting inventories of commodities as speculators hoarded such commodities, whereas in fact stocks of crude oil and agricultural products have generally been falling since last summer.2

A third concern expressed by some observers is that the exceptionally low level of U.S. interest rates has translated into excessive monetary stimulus in the EMEs. In particular, even though their economies have been expanding quite rapidly, many EMEs have been reluctant to raise their own interest rates because of concerns that higher rates could lead to further capital inflows and boost the value of their currencies. Some argue that their disinclination to tighten monetary policy has in turn resulted in economic overheating that has generated further upward pressures on commodity prices.

I do not think this explanation accounts for much of the surge in commodity prices, in part because I believe that the bulk of the rapid economic growth in EMEs mainly reflects fundamental improvements in productive capacity, as those countries become integrated into the global economy, rather than loose monetary policies. Irrespective of monetary conditions in the advanced foreign economies, it is clear that the monetary and fiscal authorities in the EMEs have a range of policy tools to address any potential for overheating in their economies if they choose to do so. Indeed, in light of the relatively high levels of resource utilization and inflationary pressures that many EMEs face at present, monetary tightening and currency appreciation might well be appropriate for those economies.

The Outlook for Consumer Prices
Turning now to the outlook for U.S. consumer prices, I anticipate that the recent surge in commodity prices will cause headline inflation to remain elevated over the next few months. However, I expect that consumer inflation will subsequently revert to an underlying trend that remains subdued, so long as increases in commodity prices moderate and longer run inflation expectations remain reasonably well-anchored.

Underlying Inflation Trends
Focusing on inflation prospects over the medium term is essential to the formulation of monetary policy because, due to lags, the medium term is the timeframe over which the FOMC’s actions can influence the economy. For this purpose, economists have constructed a variety of measures to separate underlying persistent movements in inflation from more transitory fluctuations. These measures include “core” inflation, which excludes changes in the prices of food and energy, and “trimmed mean” inflation, which exclude prices exhibiting the largest increases or decreases in any given month.

No single measure of underlying inflation is perfect, but it is notable that these measures have exhibited a remarkably consistent pattern since the onset of the recession: All show the underlying inflation rate declining markedly to a level somewhat below the rate of 2 percent or a bit less that FOMC participants consider to be consistent with the Fed’s dual mandate. For example, core PCE price inflation stood at less than 1 percent over the 12 months ending in February, down from 2-1/2 percent over the year prior to the recession. Trimmed-mean measures of inflation have also trended down over the past couple of years and are now close to 1 percent.

I want to emphasize that this focus on core and other inflation measures that may exclude recent increases in the cost of gasoline and other household essentials is not intended to downplay the importance of these items in the cost of living or to lower the bar on the definition of price stability. The Federal Reserve aims to stabilize inflation across the entire basket of goods and services that households purchase, including energy and food. Rather, we pay attention to core inflation and similar measures because, in light of the volatility of food and energy prices, core inflation has been a better forecaster of overall inflation in the medium term than overall inflation itself has been over the past 25 years.3

In my view, the marked decline in these trend measures of inflation since the intensification of the crisis largely reflects very low rates of resource utilization. Strong productivity gains have also played a role in holding down inflation because, together with low wage inflation, they have markedly restrained the rise in firms’ production costs. With resource slack likely to diminish only gradually over the next few years, it seems reasonable to anticipate that underlying inflation will remain subdued for some time, provided that longer-term inflation expectations remain well contained.

Longer-Run Inflation Expectations
In this regard, surveys and financial market data indicate that longer-run inflation expectations remain reasonably well anchored even though near-term inflation expectations have jumped in the wake of the surge in commodity prices. For example, the Thomson Reuters/ University of Michigan Survey of Consumers indicates that median inflation expectations for the coming year moved up about 1-1/4 percentage points in March, whereas the median expectation for inflation over the next 5 to 10 years increased only 1/4 percentage point. While such movements obviously bear watching, I would note that such a combination–namely, a substantial jump in near-term inflation expectations coupled with a relatively modest uptick in longer-run expectations–has often accompanied previous sharp increases in gasoline prices, and when it did, those movements were largely reversed within a few months.4

Information derived from the Treasury inflation-protected securities (TIPS) market also suggests that financial market participants’ longer-term inflation expectations remain well anchored even as the near-term outlook for inflation has shifted upward. In particular, while the carry-adjusted measure of inflation compensation for the next five years has increased about 1/4 percentage point since earlier this year, forward inflation compensation at longer horizons is roughly unchanged on net. Much of the increase in five-year inflation compensation has been associated with the surge in food and energy prices, and the level of this measure appears consistent with a normal cyclical recovery after adjusting for those effects.

Commodity Prices and Inflation
Now I would like to explain in further detail why I anticipate that recent increases in commodity prices are likely to have only transitory effects on headline inflation. The current configuration of quotes on futures contracts–which can serve as a reasonable benchmark in gauging the outlook for commodity prices–suggests that these prices will roughly stabilize near current levels or even decline in some cases. If that outcome materializes, the prices of gasoline and heating oil are likely to flatten out fairly soon, and retail food prices are likely to continue rising briskly for only a few more months. Consequently, the direct effects of the surge in commodity prices on headline consumer inflation should diminish sharply over coming months.

Over time, I anticipate that the recent surge in commodity prices will also affect the prices of a broader range of consumer goods and services that use these commodities as inputs. Many firms are seeing such costs escalate and will pass along at least part of these increased raw materials costs to their customers. Nevertheless, I expect the overall inflationary consequences of these pass-through effects to be modest and transitory, provided that longer-run inflation expectations remain well anchored. Moreover, labor costs per unit of output–the single largest component of the unit cost of producing goods and services in the business sector–are essentially unchanged since 2007, owing to both moderate wage increases and solid productivity gains. I expect that nominal wage growth and labor costs will continue to be restrained by slack in resource utilization. Indeed, it would be difficult to get a sustained increase in inflation as long as growth in nominal wages remains as low as we have seen recently.

My expectation regarding the transitory effects of commodity price shocks on consumer inflation is supported by simulation results from the FRB/US model–a macroeconometric model developed at the Federal Reserve Board and used extensively for policy analysis. Starting from a situation in which inflation is running at 2 percent and households and firms expect the FOMC to keep it there in the longer run, the model predicts that a persistent increase of $25 per barrel in the price of crude oil–that is, a rise similar to what we’ve experienced since last summer–would cause the PCE price index to rise at an annual rate of nearly 4 percent over the first two quarters following the shock. Beyond that horizon, however, total PCE inflation drops quickly to about 2-1/4 percent and then declines gradually back to its longer-run rate of 2 percent.

These fairly modest and transitory effects of an oil price shock are also consistent with the response of the U.S. economy to the dramatic run-up in commodity prices from 2002 to 2008. Indeed, while oil prices more than quadrupled over that period, measures of underlying inflation remained close to 2 percent. In my view, that outcome was crucially dependent on the stability of longer-run inflation expectations, which in turn limited the pass-through of higher production costs to consumer prices.

Risks to the Inflation Outlook
I have argued that recent commodity price shocks are likely to have only a transitory effect on inflation. But even if such a trajectory for inflation is most likely, some specific risks must be considered. First, while futures markets suggest that commodity prices will stabilize near current levels, these prices cannot be predicted with much confidence. For example, oil prices could move markedly higher or lower as a consequence of geopolitical developments, changes in production capacity, or shifts in the growth outlook of the EMEs.

In addition, the indirect effects of the commodity price surge could be amplified substantially if longer-run inflation expectations started drifting upward or if nominal wages began rising sharply as workers pressed employers to offset realized or prospective declines in their purchasing power.

Indeed, a key lesson from the experience of the late 1960s and 1970s is that the stability of longer-run inflation expectations cannot be taken for granted. At that time, the Federal Reserve’s monetary policy framework was opaque, its measures of resource utilization were flawed, and its policy actions generally followed a stop-start pattern that undermined public confidence in the Federal Reserve’s commitment to keep inflation under control. Consequently, longer-term inflation expectations became unmoored, and nominal wages and prices spiraled upward as workers sought compensation for past price increases and as firms responded to accelerating labor costs with further increases in prices. That wage-price spiral was eventually arrested by the Federal Reserve under Chairman Paul Volcker, but only at the cost of a severe recession in the early 1980s.

Since then, the Federal Reserve has remained determined to avoid those mistakes and to keep inflation low and stable. It will be important to closely monitor the state of longer-term inflation expectations to ensure that the Federal Reserve’s credibility, which has been built up over the past three decades, remains fully intact.

The Outlook for the Real Economy
Turning now to the real economy, real gross domestic product (GDP) has been rising since mid-2009 and now exceeds its level just prior to the onset of the recession. While GDP growth during late 2009 and early 2010 was largely the result of inventory restocking and fiscal stimulus, private final sales growth has picked up over the past six months–an encouraging sign. At the same time, measures of business sentiment have generally returned to pre-recession levels, factory output has been expanding apace, and the unemployment rate has dropped by a percentage point over the past few months.

Real consumer spending–which had been rising at a brisk pace in the fall–slowed somewhat around the turn of the year, and measures of consumer sentiment declined in March. Those developments may partly reflect the extent to which higher food and energy prices have sapped households’ purchasing power. More generally, however, as the improvement in the labor market deepens and broadens, households should regain some of the confidence they lost during the recession, providing an important boost to spending.

Broad Contours of the Outlook
Nonetheless, a sharp rebound in economic activity–like those that often follow deep recessions–does not appear to be in the offing. One key factor restraining the pace of recovery is the construction sector, which continues to be hampered by a considerable overhang of vacant homes and commercial properties and remains in the doldrums. In addition, spending by state and local governments seems likely to remain limited by tight budget conditions.

Moreover, while the labor market has recently shown some signs of life, job opportunities are still relatively scarce. The unemployment rate is down from its peak, but at 8.8 percent, it still remains quite elevated. And even the decline that we’ve seen to date partly reflects a drop in labor force participation, because people are counted as unemployed only if they are actively looking for work.

Some observers have argued that the high unemployment rate primarily reflects structural factors such as a longer duration of unemployment benefits and difficulties in matching available workers with vacant jobs rather than a deficiency of aggregate demand. In my view, however, the preponderance of available evidence and research suggests that these alternative structural explanations cannot account for the bulk of the rise in the unemployment rate during the recession. For example, if mismatches were of central importance, we would not expect to see high rates of unemployment across the vast majority of occupations and industries. Instead, I see weak demand for labor as the predominant explanation of why the rate of unemployment remains elevated and rates of resource utilization more generally are still well below normal levels.

Commodity Prices and the Real Economy
As I have indicated, the recent run-up in commodity prices is likely to weigh somewhat on consumer spending in coming months because it puts a painful squeeze on the pocketbooks of American households.5 In particular, higher oil prices lower American income overall because the United States is a major oil importer and hence much of the proceeds are transferred abroad. Monetary policy cannot directly alter this transfer of income abroad, which primarily reflects a change in relative prices driven by global demand and supply balances, not conditions in the United States. Thus, an increase in the price of crude oil acts like a tax on U.S. households, and like other taxes, tends to have a dampening effect on consumer spending.6

The surge in commodity prices may also dampen business spending. Higher food and energy prices should boost investment in agriculture, drilling, and mining but are likely to weigh on investment spending by firms in other sectors. Assuming these firms are unable to fully pass through higher input costs into prices, they will experience some compression in their profit margins, at least in the short run, thereby causing a decline in the marginal return on investment in most forms of equipment and structures.7 Moreover, to the extent that higher oil prices are associated with greater uncertainty about the economic outlook, businesses may decide to put off key investment decisions until that uncertainty subsides. Finally, with higher oil prices weighing on household income, weaker consumer spending could discourage business capital spending to some degree.

Fortunately, considerable evidence suggests that the effect of energy price shocks on the real economy has decreased substantially over the past several decades. During the period before the creation of the Organization of the Petroleum Exporting Countries (OPEC), cheap oil encouraged households to purchase gas-guzzling cars while firms had incentives to use energy-intensive production techniques. Consequently, when oil prices quadrupled in 1973-74, that degree of energy dependence resulted in substantial adverse effects on real economic activity. Since then, however, energy efficiency in both production and consumption has improved markedly.

Consequently, while the recent run-up in commodity prices is likely to weigh somewhat on consumer and business spending in coming months, I do not anticipate that those developments will greatly impede the economic recovery as long as these trends do not continue much further. For example, the simulation of the FRB/US model that I noted earlier indicates that a persistent increase of $25 per barrel in oil prices would reduce the level of real GDP about 1/2 percent over the first year and a bit more thereafter. The magnitude of that effect seems broadly consistent with the estimates of professional forecasters; for example, the Blue Chip consensus outlook for real GDP growth has edged down only modestly in recent months.

Monetary Policy Considerations
Let me now turn to the stance of monetary policy. As you know, monetary policy has been highly accommodative since the financial crisis intensified. In December 2008, the FOMC lowered the target federal funds rate to near zero and started to provide forward guidance concerning its likely future path. As in its statements since March 2009, the Committee reiterated last month that “economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels for the federal funds rate for an extended period.” In addition, the FOMC has purchased a substantial volume of agency debt, agency mortgage-backed securities, and longer-term Treasury securities. The Committee initiated a second round of Treasury purchases last November and has indicated that it intends to complete those purchases by the end of June. My reading of the evidence is that these securities purchases have proven effective in easing financial conditions, thereby promoting a stronger pace of economic recovery and checking undesirable disinflationary pressures.

I believe this accommodative policy stance is still appropriate because unemployment remains elevated, longer-run inflation expectations remain well anchored, and measures of underlying inflation are somewhat low relative to the rate of 2 percent or a bit less that Committee participants judge to be consistent over the longer term with our statutory mandate. However, there can be no question that sometime down the road, as the recovery gathers steam, it will become necessary for the FOMC to withdraw the monetary policy accommodation we have put in place. That process will involve both raising the target federal funds rate over time and gradually normalizing the size and composition of our security holdings. Importantly, we are confident that we have the tools in place to withdraw monetary stimulus, and we are prepared to use those tools when the right time comes.

Of course, there are risks to the outlook that may affect the timing and pace of monetary policy firming. In my view, however, even additional large and persistent shocks to commodity prices might not call for any substantial change in the course of monetary policy as long as inflation expectations remain well anchored and measures of underlying inflation continue to be subdued. As I noted earlier, a surge in commodity prices unavoidably impairs performance with respect to both aspects of the Federal Reserve’s dual mandate: Such shocks push up unemployment and raise inflation. A policy easing might alleviate the effects on employment but would tend to exacerbate the inflationary effects; conversely, policy firming might mitigate the rise in inflation but would contribute to an even weaker economic recovery. Under such circumstances, an appropriate balance in fulfilling our dual mandate might well call for the FOMC to leave the stance of monetary policy broadly unchanged.

That said, in light of the experience of the 1970s, it is clear that we cannot be complacent about the stability of inflation expectations, and we must be prepared to take decisive action to keep these expectations stable. For example, if a continued run-up in commodity prices appeared to be sparking a wage-price spiral, then underlying inflation could begin trending upward at an unacceptable pace. Such circumstances would clearly call for policy firming to ensure that longer-term inflation expectations remain firmly anchored.

Conclusion
In summary, the surge in commodity prices over the past year appears to be largely attributable to a combination of rising global demand and disruptions in global supply. These developments seem unlikely to have persistent effects on consumer inflation or to derail the economic recovery and hence do not, in my view, warrant any substantial shift in the stance of monetary policy. However, my colleagues and I are paying close attention to the evolution of inflation and inflation expectations, and we are prepared to act as needed to help ensure that inflation, over time, is at levels consistent with our statutory mandate.

Read the original article HERE.

By Jayne O’Donnell
March 31, 2011
USA TODAY

U.S. consumers face “serious” inflation in the months ahead for clothing, food and other products, the head of Wal-Mart’s U.S. operations warned Wednesday.

The world’s largest retailer is working with suppliers to minimize the effect of cost increases and believes its low-cost business model will position it better than its competitors.

Still, inflation is “going to be serious,” Wal-Mart U.S. CEO Bill Simon said during a meeting with USA TODAY’s editorial board. “We’re seeing cost increases starting to come through at a pretty rapid rate.”

Along with steep increases in raw material costs, John Long, a retail strategist at Kurt Salmon, says labor costs in China and fuel costs for transportation are weighing heavily on retailers. He predicts prices will start increasing at all retailers in June.

“Every single retailer has and is paying more for the items they sell, and retailers will be passing some of these costs along,” Long says. “Except for fuel costs, U.S. consumers haven’t seen much in the way of inflation for almost a decade, so a broad-based increase in prices will be unprecedented in recent memory.”

Consumer prices — or the consumer price index — rose 0.5% in February, the most since mid-2009, largely because of surging food and gasoline prices. Core inflation, which excludes volatile food and energy costs, rose a more modest 0.2%, though that still exceeded estimates.

The scenario hits Wal-Mart as it is trying to return to the low across-the-board prices it became famous for. Some prices rose as the company paid for costly store renovations.

“We’re in a position to use scale to hold prices lower longer … even in an inflationary environment,” Simon says. “We will have the lowest prices in the market.”

Major retailers such as Wal-Mart are the best positioned to mitigate some cost increases, Long says. Wal-Mart, for example, could have “access to any factory in any country around the globe” to mitigate the effect of inflation in the U.S., Long says.

Still, “it’s certainly going to have an impact,” Long says. “No retailer is going to be able to wish this new cost reality away. They’re not going to be able to insulate the consumer 100%.”

Read the entire article HERE.

By Stephanie Clifford
Published: Monday, 28 Mar 2011
New York Times

Chips are disappearing from bags, candy from boxes and vegetables from cans.As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages.

With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”

Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.

Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”

In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).

Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.

“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”

Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.

Most companies reduce products quietly, hoping consumers are not reading labels too closely.

But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.

Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.

Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.

And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.

“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at Focus.com, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.

Or marketers design a new shape and size altogether, complicating any effort to comparison shop. The unwrapped Reese’s Minis, which were introduced in February, are smaller than the foil-wrapped Miniatures. They are also more expensive — $0.57 an ounce at FreshDirect, versus $0.37 an ounce for the individually wrapped.

At H. J. Heinz, prices on ketchup, condiments, sauces and Ore-Ida products have already gone up, and the company is selling smaller-than-usual versions of condiments, like 5-ounce bottles of items like Heinz 57 Sauce sold at places like Dollar General.

“I have never regretted raising prices in the face of significant cost pressures, since we can always course-correct if the outcome is not as we expected,” Heinz’s chairman and chief executive, William R. Johnson, said last month.

While companies have long adjusted package sizes to appeal to changing tastes, from supersizes to 100-calorie packs, the recession drove a lot of corporations to think small. The standard size for Edy’s ice cream went from 2 liters to 1.5 in 2008. And Tropicana shifted to a 59-ounce carton rather than a 64-ounce one last year, after the cost of oranges rose.

With prices for energy and for raw materials like corn, cotton and sugar creeping up and expected to surge later this year, companies are barely bothering to cover up the shrinking packs.

“Typically, the product manufacturers are doing this slightly ahead of the perceived inflationary issues,” Ms. Rosenblum said. “Lately, it hasn’t been subtle — I mean, they’ve been shrinking by noticeable amounts.”

Read the entire article HERE.

Saumil H. Parikh
March 2011
PIMCO

Each quarter, PIMCO investment professionals from around the world gather in Newport Beach to discuss the outlook for the global economy and financial markets. In an interview, senior portfolio manager Saumil Parikh discusses PIMCO’s cyclical economic outlook for the next six to 12 months. Parikh, who leads the forums, is a managing director, generalist portfolio manager and member of PIMCO’s Investment Committee.

Parikh also comments on investment strategies that PIMCO is applying to manage risk and deliver returns amid global uncertainty and shifting growth dynamics.

Q: Could you discuss the economic recovery in the U.S. and whether PIMCO believes it will be a lasting rebound?
Parikh: I would first note that, as a baseline, PIMCO continues to foresee a multi-speed global recovery over the next few years, with advanced economies facing muted growth and unusually high unemployment, while systemically important emerging economies continue gradually to close the global income and wealth gap. This forecast is governed by more favorable initial conditions of debts and deficits in emerging markets as well as by the loss of capacity for fiscal stimulus in certain developed nations.

Having said that, there are certain cases where the cyclical outlook deviates somewhat from the secular outlook. Nowhere is this juxtaposition between the secular (three to five years) and cyclical (a year or less) more evident than in the U.S. The country is experiencing a cyclical economic rebound, but its strong durability is uncertain. While endorsing the resilience and innovation of U.S. citizens and the economy, there are concerns about the country’s ability to achieve in the short-term “escape velocity” due to the legacy of the global financial crisis and other structural headwinds.

Currently, governmental revenues are not growing fast enough to close deficits in a pro-growth manner, and the private sector continues to deleverage. As a result, the national savings rate has continued to decline as opposed to rise as is customary during a self-sustained recovery. Meanwhile, on the margin, political winds are changing and the next fiscal policy surprise could be contractionary – as opposed to the expansionary tax-cut deal of late 2010. And, further, we are concerned about the potential economic drag if oil prices remain elevated.

Bottom line: On a cyclical timeline, and also taking into account the external environment, we continue to forecast a 3.0%–3.5% real U.S. GDP growth rate for 2011, with risks tilted toward slower growth in 2012.

Q: And will the Federal Reserve extend quantitative easing?
Parikh: We do not anticipate that the Fed will add to the total quantity of Treasury purchases this year. If it were to change course, it could taper off the purchases (e.g., so instead of ending abruptly in June, the Fed starts buying less in April or May and stretches out purchases a few months beyond June).

Q: What is PIMCO’s outlook for Europe?
Parikh: The cyclical outlook for the eurozone and U.K. economies contrasts starkly with that of the U.S. Notwithstanding the favorable developments in Germany, several countries there face headwinds to growth via national austerity measures and the resulting fiscal drag over our cyclical horizon.

In our detailed forum discussion about the internal dynamics of Europe, the core economies are expected to achieve at- or above-potential economic growth due to strong initial conditions of competitiveness and a significant tailwind from emerging market external demand. Also, PIMCO sees a non-trivial probability of fat tails on both ends (positive or negative) for the European economy in 2011, depending on whether the sovereign crisis affecting Greece, Portugal and Ireland can be successfully quarantined before spreading to Spain and Italy.

Q: Turning to Japan, many of us have watched the incredible images of the events and the tragedy inflicted there. Certainly others are commenting on the humanitarian needs; perhaps you could discuss the impact on Japan’s economy and if there is hope on that front?
Parikh: The images are devastating and point to the massive calamities that have hit that country. Japan’s immediate focus is rightly on the enormous human suffering and on rescue operations, as well as containing nuclear-reactor risks.

Japan’s leaders have moved swiftly to stem fallout from the earthquake and tsunami on all fronts, including economic. Within days of the disaster, the Bank of Japan injected a record 15 trillion yen ($183 billion) into the world’s third-largest economy.

Japan’s economic growth rate will likely fall in the immediate aftermath of the natural disasters, but reconstruction activities should have a stimulative impact on growth over time. The loss of inventories and supply-chain disruptions could cause inflation to rise temporarily from very low levels.

Much will depend on the extent of the damage to Japan’s infrastructure. We are hoping for the best.

Q: Dramatic events are also sweeping the Middle East – is the region a threat to the global economic recovery?
Parikh: Certainly we are concerned that the sharp rise in global oil prices, and the threat that supply uncertainties could spur further increases, could lead to negative global growth consequences. A truly severe oil shock could shift our global GDP outlook from a soft landing to a more significant downturn with sharply stagflationary effects.

We continue, as with much of the world, to monitor and evaluate the situation closely. The risks are very asymmetric given the starting point of oil prices in 2011.

Q: Let’s shift to emerging markets. Does PIMCO still see them as drivers of global growth?
Parikh: We expect real economic growth in the major emerging economies of China, Brazil, Russia, India and Mexico to remain at a solid rate during 2011, but lower than 2010 due to fading monetary and fiscal policy tailwinds and some pockets of overheating.

In terms of composition, we see growth across the major emerging markets becoming more balanced, with less reliance on the inventory cycle as well as net trade and capital investments, and marginally more reliance on domestic final consumption as an engine for growth.

The main challenge for the major emerging economies in 2011 is managing the risk of greater overheating in the domestic economies. We judge idle capacity to be negligible and cyclical inflation and cost-push pressures on the rise to a degree that could threaten corporate profits, leading to a larger-than-expected slowdown. Once again, and similar to the U.S. outlook, the level and volatility of oil prices are a major cyclical risk to the emerging market growth outlook.

Q: What is PIMCO’s outlook on inflation and interest rates if the situation in the Middle East does not lead to a severe oil shock?
Parikh: Setting aside immediate oil shocks, we believe global inflation has cyclically troughed and we see a secular upswing in inflation, which naturally will put upward pressure on interest rates.

We see three key global factors as potentially adding to inflation over a long horizon:

* The degradation of sovereign balance sheets and the structural inflexibility of fiscal deficits.
* Emerging markets used to export disinflation to the developed world, but over the secular horizon we see them as exporting inflation.
* As populations age, they tend to save less and consume more. Demographics may thus become an inflationary force globally, though possibly this risk will be balanced somewhat by demographics in emerging nations.

In the near term, we anticipate most, though not all, global central banks are likely to err on the side of allowing inflation to rise above stated or implied targets during 2011. In the U.S., if the economic recovery sputters, the Fed could expand quantitative easing. But further deficit accommodation would pose inflation risks.

Q: Finally, could you discuss how PIMCO is applying its global outlook to its investment strategies?
Parikh: Let’s begin with inflation, which is a topic clients often ask us about, and how that applies to our investing decisions. Since we see a secular bias to global inflation, we expect fixed income yields to gradually rise; we believe the 20-plus-year secular duration tailwind that previously anchored portfolios is over.

So we have taken down duration in our strategies, moving to shorter maturity securities. For example, while we still have faith in the credit quality of U.S. Treasuries, we feel yields on longer-dated notes and bonds are likely to rise as the Federal Reserve ends its quantitative easing and investors price in growing inflation risks.

We continue to focus on attractive opportunities in other areas in the U.S. and across the globe, including foreign currencies and credits. There are lots of opportunities in this global marketplace. Finally, we are tempering our near-term enthusiasm for U.S. corporate bonds with a long-term outlook that the U.S. economy must eventually address fiscal deficits, rising rates and the potential for higher oil prices and those could all be negative factors for U.S. companies and the bonds they issue.

Read the entire article HERE.

Saumil H. Parikh

Mr. Parikh is a managing director in the Newport Beach office, generalist portfolio manager and a member of the PIMCO Investment Committee. He leads the firm’s cyclical economic forums and also serves as a member of the short-term, mortgage and global specialist portfolio management teams. Prior to joining PIMCO in 2000, Mr. Parikh was a financial economist and market strategist at UBS Warburg. He has 12 years of investment experience and holds undergraduate degrees in economics and biology from Grinnell College.

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.

Read the entire article HERE.