Inflation Rears its Ugly Head as Gas and Food Prices Rise
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The Fiscal Times
March 2, 2011

The U.S. economy expanded over the last two months, according to the Federal Reserve’s latest ‘beige book’ released on Wednesday. But rising oil, food and commodity prices are forcing some businesses to pass along those costs to consumers, a sign that inflation is a growing threat.

Wages that are indexed to Inflation could also feed the inflation beast according to Alfredo Coutino, economist with Moody’s Analytics. Meanwhile, with gas prices at a two-and-a-half year high, and global food prices up 25 percent last year because of adverse weather conditions, American consumers and businesses are becoming increasingly uneasy, economists say. “Strong commodity prices were benefitting producers of cotton, corn, soybeans, wheat, poultry, hogs and cattle while there are also some reports of rising input prices, particularly in fertilizer and feed prices.” Federal Reserve Chairman Ben Bernanke said on Wednesday that the central bank is prepared to take action should higher commodity prices begin to have a negative effect on U.S. economic growth.

“The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation,” Bernanke told the House Committee on Financial Services in his semi-annual report on the state of the economy.

The beige book report found a wide range of bright spots in several areas of the economy, including manufacturing, commercial real estate, retail spending, automobile sales and the labor market. However, the housing sector continues to be a drag on the economy and construction sales remained at low levels.

Eleven of the 12 districts reported solid manufacturing activity since the last report in January.

Retail spending strengthened in 10 of 12 areas when compared to one year ago. Although some retailers in the northeast suffered from severe winter weather in January, most districts expect a modest increase in sales in the coming months, the report said.

Automobile sales picked up in most areas except Detroit, but that was mostly attributed to severe weather. There was also an increase in available auto financing.

Labor markets, meanwhile, saw marked improvement in most districts. However there is concern about the “inability for employers in some districts to find qualified workers. In this report that phenomenon was reported in Boston within high-skill industries, and in Cleveland in the trucking industry,” said Marisa Di Natale, economist with Moody’s Analytics. Still, wages continue to hold steady, indicating the market for skilled workers is not tight enough to cause wages to rise, she said.

The ‘Beige Book’ report comes ahead of the February unemployment rate to be released on Friday.
The report, the second of eight this year, is a roundup of economic data from 12 districts in the U.S. and reported that overall, the economy continued to expand at a modest to moderate pace in January and early February.

Related Links:
Fed’s ‘Beige Book’ Shows Improvement in U.S. Economy, Moderate Growth (The Washington Post) 
Fed Beige Book Sparks Selling in Treasury’s—30 Year Big Loser (Wall Street Journal)
Fed’s Beige Book Points to Inflation (Financial Times)