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Food costs soaring in US after harsh winter. Will higher prices last?

Higher wholesale food prices contributed to a jump in the producer price index in February, the US reported Wednesday. Consumers are likely to see food prices rise at least 4 percent in 2011.

By Ron SchererStaff writer / March 16, 2011

Maria Mateus shopped for groceries at a supermarket in Santa Clara, Calif., on March 8. Analysts expect a hike in meat and dairy prices, in particular, due to the effect of bad weather on feed corn.

Tony Avelar / The Christian Science Monitor

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After several years of almost no inflation, many Americans may be surprised to find some of their favorite foods, from burgers to pizza to a glass of orange juice, rising in price this year.

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The producer price index, which measures changes in wholesale prices, rose 1.6 percent last month, mainly because of a jump in food prices, the Department of Labor Statistics reported on Wednesday. The food segment, up 3.9 percent, saw the biggest monthly increase since November 1974, with soaring vegetable prices responsible for about 70 percent of that jump. On Thursday, the government will report the consumer price index.

In the year ahead, expect to see the largest food price increases in the protein group: chicken, beef, and pork, as well as dairy items. One key reason: The price of corn, used as feed by ranchers and farmers, has doubled in the past year. But vegetarians won't get off easy: Produce and orange juice are rising sharply, as well.

Higher food prices have wide economic ramifications and are being watched closely by the Federal Reserve. From a business standpoint, food producers – from agricultural giants to the corner pizza parlor – must raise prices or watch their profit margins evaporate. Many middle-class households are financially stretched to the limit, so any extra expense for such basics as milk or bread makes their life even tougher. Organizations that help the poor with food, moreover, find they can't help as many people because their dollar doesn't go as far.

"The more you have to spend on a loaf of bread and a pound of ground beef, the less you have to spend on everything else," says Mark Zandi, chief economist at Moody's Analytics in West Chester, Pa. "It's like a tax increase, although it's not quite as bad as rising oil prices, since at least the revenues go to US farmers, truckers, and ag-equipment manufacturers."

The US Department of Agriculture expects the average price of food in 2011 to be 4 percent higher than last year. Some private forecasters say that, by December, prices could be as much as 6 percent higher than in December 2010.

"If food inflation comes in at 6 percent, it would be the most dramatic increase since 1982," says William Lapp, a consumer foods economist with his own firm, Advanced Economic Solutions in Omaha, Neb. "We had a 10-year period, from 1972 to 1981, when annual food prices rose sharply – including a two-year period when increases averaged 8.7 percent."

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