HEMPSTEAD, N.Y. (MarketWatch) — Just when you thought it was safe to stop worrying about inflation, along come higher food prices to change your mind.
Nowadays, lots of attention is being paid to falling energy prices and their impact on the overall price level. With the price of crude oil slipping below $60 a barrel on Monday, down from over $75 less than two months ago, many pundits, politicians and the press are hoping that the Federal Reserve will soon declare victory over inflation and start cutting interest rates.

Not so fast. There’s a little matter of rising food prices that needs to be reckoned with. And, as you know, food is every bit as important as energy.
The Commodity Research Bureau reports that spot prices of foodstuffs have jumped 14% over the past six months; 8% since June alone. At the wholesale level, prices of finished foods rose at an annual rate of nearly 17% in August, according to the Bureau of Labor Statistics, while retail prices of meats, poultry, fish, eggs, fruits and vegetables went up at more than a 12% annual rate last month.

Several factors have conspired to push food prices higher even in a slowing economy.

The rise in energy prices over the past year has had a major effect on food prices. Fertilizer costs have shot up, as has the cost of running farm machinery. Needless to say, more expensive fuel has also boosted the cost of transporting and processing foodstuffs, with surcharges becoming commonplace.
Don’t think for one moment that falling energy prices will translate into lower food tags. When’s the last time you heard of anyone reducing a surcharge? At any rate, besides fuel, food companies are passing along to consumers the higher cost of everything from wheat and beef to packaging and marketing.
Speaking of energy, the ethanol industry’s growing appetite for corn is taking a bite out of supplies of this key crop, sending prices skyward over the past year.

But energy is only one of the reasons for the run up in food prices. The weather has played hob with food supplies as well. There’s been too much rain in some parts of the Farm Belt and not enough moisture in others. As a matter of fact, temperatures in July were the hottest since the 1936 Dust Bowl.
Food supplies are also being affected by lack of help. Farmers in many states rely on seasonal workers to harvest their crops, and stepped-up border enforcement has kept many illegal migrant workers from entering this country. Not surprisingly, inventories of many foodstuffs are at their lowest levels in over 30 years.

Global demand for foods is far outpacing supplies. Weather considerations aside, a lot has to do with China’s rapid pace of industrialization, which is causing the country to devote less of its resources to farming and more to manufacturing and construction.

Finally, there’s the rising cost of money. Most growers have to pay a lot more to borrow money this year than they did last year because of the Fed’s interest rate hikes. Ironically, by pushing up food prices, this may keep the Fed from lowering rates anytime soon.

Dr. Irwin Kellner is chief economist for MarketWatch. He also is the Weller professor of economics at Hofstra University and chief economist for North Fork Bank.

* Anyone shopping at Safeway the past 6 months knows this for sure! – rocketman