Energy and Food Prices Fueling Inflation

By Mike Caggeso
Associate Editor

Inflation rose in 2007 by its sharpest rate in 17 years, pushed by increased costs for energy and food, the U.S. Department of Labor reported. 

Consumer prices rose by 4.1% in 2007 – up from the 2.5% rise in 2006. Energy prices jumped 17.4% and food prices increased 4.8% last year - both the highest gains since 1990. Oil’s surging price accounted for increases in energy costs while dairy [up 13.4%] and cereal and bakery products [up 5.4%] were blamed for increased food prices. 

Increased transportation costs [up 8.3%] and medical costs [up 5.2%] were also culprits. The Labor Department’s CPI report showed inflation for the year rose at its highest pace since 1990’s 6.1% increase in prices.

However, outside of energy and food prices, inflation increased a slight 0.2% in December. For the year, core inflation (ex. food and fuel) rose 2.4%, down from 2.6% in 2006.

The Consumer Price Index (CPI) is a measure of the average change in prices over time of goods and services [food, clothing, shelter, fuel, doctor fees, drugs, etc.] purchased by households. Prices are collected in 87 urban areas across the country from about 50,000 housing units and approximately 23,000 retail establishments [department stores, supermarkets, hospitals, filling stations and other types of stores] and service establishments, the Labor Department said.

Escalating Economic Concerns

The report compounds worries from two other government economic reports issued earlier this year.

On Jan. 2, spending on residential construction fell for the 21st straight month. And on Jan. 4, the Labor Department said that unemployment rose from 4.4% last year to 5.0% and nonfarm payroll employment was relatively unchanged at 18,000 jobs added. 

Pulled together, the falling economic indicators and overall sentiment is leading many to believe the United States is heading for a recession, if its not already experiencing one.

“The U.S. economy in 2008 will be like a cat on a hot tin roof that has already used up eight of its nine lives,” Stuart G. Hoffman of PNC Financial Services Group Inc, told the Wall Street Journal.

Though U.S. Federal Reserve Chairman Ben Bernanke is becoming more frank in his economic analysis, he’s careful not to say the dreaded R-word.

“A number of factors, including higher oil prices, lower equity prices, and softening home values, seem likely to weigh on consumer spending [in 2008],” he said last week, speaking before a group from the Exchequer Club and Women in Housing and Finance in Washington. 

Analysts and investors welcomed Bernanke’s remarks. Most saw it as a sign that the Fed will lower the key interest rate by 50 basis points at the next Federal Open Market Committee meeting slated for Jan. 29 and 30. Interest rate futures are currently pricing in a 90% probability of a half-point rate cut.

“Price pressures may be a little greater than the Fed would like, but with the economy hitting the skids, inflation is not so high to stand in the way of aggressive action,” Joel L. Naroff, president and chief economist of Naroff Economic Advisors, said in a note to clients.


News and Related Links:

  • United States Labor Department:

Consumer Price Index: December 2007

  • Money Morning:

Money Morning’s Three-Minute Review: How Last Week’s Events Will Shape This Week’s Action

  • Wall Street Journal:

Inflation Rate Worse in 17 Years

  • Money Morning:

Bernanke Says Fed is Ready to Act