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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.

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Three reasons food costs more

Mr. Lapp attributes the expected price increases to three main factors:

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•The expanding middle class in rapidly developing countries such as Brazil, India, and China is boosting its consumption of protein, driving up demand.

•The US dollar has been weaker, helping American farmers to export their products but potentially leaving less for domestic consumption.

•Almost 40 percent of the US corn crop is now used to produce ethanol instead of food, although the farm lobby denies that diverting corn to ethanol production raises food prices.

Harsh winter weather is responsible for some of the food-price hikes. In December, cold weather in Florida wiped out the pepper, tomato, and green bean crops. A freeze in Mexico knocked out produce from there as well.

"It's kind of rare to have a one-two punch like that," says Lisa Lockridge, a spokeswoman for the Florida Fruit & Vegetable Association in Maitland, Fla. With two months of warmer weather in Florida, farmers will have produce back on the shelves by April, she says.

While that may help produce prices, critical grain crops may have more challenging weather ahead, says Paul Pastelok, senior meteorologist at in State College, Pa. He expects the Midwest to be cooler than normal this spring, even into the summer. "This could stunt growth and the crop yield," he says.

Why Fed isn't warning of inflation

Normally, climbing prices might raise caution flags at the Federal Reserve. But in his March 1 testimony before Congress, Fed Chairman Ben Bernanke said he didn't view increases in commodity prices as a problem, in part because "inflation expectations" are "quite well anchored, which helps to keep inflation stable, even if there are temporary movements coming from commodity prices."

"The Fed's view is that there is very litle pass-through of higher costs," says Mr. Zandi. In addition, the Fed chairman is sanguine because bond investors have not indicated any fear of inflation or efforts to hedge against it in the financial markets, says Robert Brusca, an economist with Fact & Opinion Economics in New York.

Mr. Bernanke said he will continue to monitor inflation development, especially if inflation expectations were to rise.


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