As Food Prices Rise, Fed Keeps a Watchful Eye

As Food Prices Rise, Fed Keeps a Watchful Eye

Central Bank Officials Sometimes Look Past Food-Cost Increases

By 

BEN LEUBSDORF and 

JON HILSENRATH 

CONNECT

Updated July 6, 2014 10:30 p.m. ET

Hamburger prices rose after drought conditions reduced cattle herds. Bloomberg News

U.S. food prices are on the rise, raising a sensitive question: When the cost of a hamburger patty soars, does it count as inflation?

It does to everyone who eats and especially poorer Americans, whose food costs absorb a larger portion of their income. But central bankers take a more nuanced view. They sometimes look past food-price increases that appear temporary or isolated while trying to control broad and long-term inflation trends, not blips that might soon reverse.

The Federal Reserve faces an especially important challenge now as it mulls the long-standing dilemma of what to make of the price of a pork chop.

As Fed officials debate when to start raising short-term interest rates to prevent the economy from overheating and causing inflation, Fed Chairwoman Janet Yellen has signaled she wants to take her time.

Broad measures of inflation have been running below the Fed's 2% target for more than two years, but show signs of picking up. And the unemployment rate has fallen to 6.1% from 7.5% a year ago, which suggests that slack in the labor market is diminishing and the risk of overheating is gradually rising.

A broad rise in inflation would be an added signal that the time to move on rates is nearing. That is putting pressure on the Fed to separate food inflation signals from noise.

The consumer price of ground beef in May rose 10.4% from a year earlier while pork chop prices climbed 12.7%. The price of fresh fruit rose 7.3% and oranges 17.1%. But prices for cereals and bakery products were up just 0.1% and vegetable prices inched up only 0.5%.The U.S. Department of Agriculture predicts overall food prices will increase 2.5% to 3.5% this year after rising 1.4% in 2013, as measured by the Labor Department's consumer-price index.

In a typical supermarket, shoppers are seeing higher prices around the store's periphery, in the produce section and at the meat counter."Your center aisles, more of the nonperishable goods, are seeing below-average inflation because commodities and the factors that go into producing them haven't been increasing the same way," USDA economist Annemarie Kuhns said.

The uneven rise points to disparate forces affecting food prices. Drought in Oklahoma and Texas is driving up cattle prices. A disease known as porcine epidemic diarrhea virus has killed millions of piglets and contributed to higher hog prices. A disease known as citrus greening is killing Florida's orange and grapefruit trees, driving up citrus prices. Most of the shrimp eaten in the U.S. comes from Southeast Asia, where a bacterial infection has devastated stocks. Coffee prices have risen this year due to a drought in Brazil.

U.S. food prices are increasing, raising a sensitive question: When the cost of a hamburger patty soars, does it count as inflation? WSJ chief economic correspondent Jon Hilsenrath joins the News Hub with Simon Constable to discuss. Photo: Getty

Fed Chairwoman Janet Yellen plans to take her time in raising interest rates. Getty Images

These factors suggest recent food inflation springs from special factors constraining supplies in a few areas, as opposed to broad increases in demand, which might propel the kind of across-the-board consumer prices increases that the Fed tries to stem.

The Fed's official statement of objectives targets 2% inflation over the medium term as measured by a broad index of inflation called the personal consumption expenditure price index, which includes measures of food and energy. Though the Fed focuses on this broad measure, it also watches measures that exclude food and energy movements, since those sectors are volatile and sometimes send misleading signals about broader trends.

The broad PCE index was 1.8% higher in May than a year earlier, its 25th straight month below the Fed's target. Still, it has accelerated from a 0.8% rise as recently as February. Excluding food and energy the index has picked up to 1.5% from 1.1%, suggesting that broader factors are starting to drive inflation higher.

Ms. Yellen noted in her most recent news conference that inflation readings have been "a bit on the high side" lately, but warned "the data that we're seeing is noisy. "But divisions are emerging on this question. "I don't think the past few months are entirely noise," Richmond Fed President Jeffrey Lacker retorted after a June 26 speech in Lynchburg, Va. If food-price inflation were spreading more broadly, it might first show up at restaurants, but so far that isn't happening. The cost of eating at full-service restaurants was 2.2% higher in May than a year earlier, in line with its trend of the past year, according to Labor Department statistics. Grocery costs, by contrast, were up 2.7% in June, accelerating from increases of less than 1% for much of 2013.

Some restaurants are reluctant to pass on higher food cost to diners. Low prices "are what our customers are counting on," said Jamie Richardson, a vice president for government and shareholder relations at White Castle Management Co. "People are dining out more frequently and we're encouraged by that," he said. "At the same time we're cautious because a recovery could be killed in the crib by higher food costs."