In the desserts aisle of a bustling Manhattan grocery store, South Carolina natives Nancy and Keith Huffaker place a box of assorted cookies in their shopping basket. They’ve come out to satisfy their after-dinner sweet tooth and though they admit the prices are higher in New York, they don’t believe food prices are on the rise.
“I’ve been here for three years and I don’t think it’s too bad,” said Mr. Huffaker. “But you can use more discretion with food, like change brands. Gas prices are a bigger threat.”
U.S. wholesale prices increased for the eighth consecutive month in February, led by a sharp rise in food prices—the highest since 1974. Energy prices also jumped. But some consumers, like the Huffakers, say they have yet to notice a difference on their grocery tab. Economists said producers might feel the pinch as they struggle to pass on the higher costs.
Food and energy prices rose 3.9 percent and 3.3 percent, respectively. According to the Bureau of Labor Statistics’ report, higher prices for gasoline as well as heating oil and residential electric power contributed to the surge in energy prices. In food, higher prices for fresh and dry vegetables can be accounted for the rise.
The rise in food prices came as a surprise to forecasters. Freezing temperatures in vegetable-growing areas may be one cause.
Mrs. Huffaker said she visits the grocery store at least a couple times a week. When she is down in South Carolina, she shops more selectively because there are more stores with cheaper options. As far as a change in food prices overall, she said she hasn’t seen one.
Kevin Harris, chief economist at Informa Global Markets, said demand remains too low for increased prices to reach consumers. The higher prices would have to be absorbed by producers by lowering profits or through productivity gains—which could mean workers produce more without getting paid more.
“Lower profits mean reduced incentives to expand or purchase capital. Stagnant wages means slower growth in household spending, which in turn means slower growth in demand,” Harris said.
The producer price index (PPI) rose 1.6 percent from the previous month. Forecasters had expected a 0.7 percent gain. The core PPI, which excludes food and energy, increased by only 0.2 percent, which was expected by most economists.
Despite the larger than expected increase in food and energy, economists do not believe inflation to be a threat. David Semmens, economist at Standard Chartered Bank, said the core PPI, not the food and energy prices, are a better representation of the overall economy.
“Consumers remain too price sensitive for the pass through [of rising prices] to be significant,” Semmens said.
James O’Sullivan, chief economist at MF Global, said the increases were expected, especially in energy. He said the broader consumer price index would be the number to look out for.
“There’s some acceleration at the core level,” O’Sullivan said. “But prices are more diluted at the consumer level.”
He added that there is without a doubt a pass through to consumers in energy and even food prices, but there is limited pass through in core prices.
Fed officials said at its most recent meeting that though higher oil prices are putting upward pressure on U.S. inflation, it is only temporary. The Fed has repeatedly expressed that inflation remains below its 2 percent target.
“Throughout the fall, we weren’t hearing business contacts claim much, if any, pricing power,” said Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, at a March 7 conference for the National Association for Business Economics. “Now, however, we are hearing some of our business contacts express conviction that they can push through price increases and plan to try to do so throughout the course of the year.
“That said, my sense at the moment is there is still concern that demand is fragile and pricing power too limited for most markets to take extensive price increases,” Lockhart said.
Companies, such as PepsiCo, and other manufacturers and retailers have reported that they are raising prices, despite low demand. The consumer price index (CPI), to be released on Thursday, is expected to show a 0.5 percent rise.