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Wholesale prices take a leap Retailers may hesitate to pass on costs

Times Staff Writers

Soaring food and fuel costs caused wholesale prices to rise much faster than expected last month, raising the possibility of more sticker shock for consumers and more inflationary pressure for the nation’s economy.

The producer price index jumped 1.1% in March from February -- nearly triple the 0.4% increase that analysts expected, the Labor Department reported Tuesday. Over the last 12 months, the index was up 6.9%, led by a 20% leap in energy prices and a 5.8% increase for food.

“Core” producer prices, which exclude food and energy, rose only a modest 0.2% in March. But that’s small comfort for consumers whose household budgets have been stretched by the rising costs of driving and eating.

“As a consumer, I can’t ignore food and energy,” said Ken Matheny, an economist with Macroeconomic Advisers, a St. Louis forecasting firm.

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However, increases in wholesale prices don’t necessarily translate into comparable rises in consumer prices. The Labor Department is due to release its consumer price index for March today.

The run-up in energy prices reflects a continuing ascent in the price of crude oil, which topped $114 a barrel in futures trading Tuesday. That is taking its toll in car-dependent Southern California, where a gallon of self-serve regular gasoline averaged $3.78 at the pump Tuesday, up 15% from a year ago, according to research firm Oil Price Information Service.

Rising food prices, meanwhile, can be traced straight back to the farm.

“We are seeing 25 years of agriculture inflation in six months,” said Geoffrey Vanden Heuvel, a Chino dairy farmer.

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On Tuesday, Vanden Heuvel said he paid $238 a ton -- 42% more than a year ago -- for hay to feed his 1,400 dairy cows.

Ray Souza, a Turlock, Calif., dairy farmer, said the only reason he was in the black was that last year he signed contracts for a year’s supply of feed corn for his 700 dairy cows at $170 a ton -- about $100 a ton less than the current rate. But he’s worried about what will happen when his contract runs out in October.

“There are high prices for milk right now, but we already have almost no profit margin,” Souza said.

The surging feed costs paid by partly reflect the planting of thousands of acres of prime California agricultural land with high-value crops such as grapes and almonds instead of hay.

In other states, farmland is being diverted to grow corn for ethanol production and for wheat and soy, the prices of which have soared in response to a global shortage caused by droughts and rising demand.

Produce farmers also are seeing their expenses soar.

“We had budgeted for a 30% increase in the price of fertilizer and it’s up 100% or more,” said Craig Underwood, who grows 1,200 acres of blueberries, lemons, avocados, peppers, carrots and beets in Ventura County.

Underwood said he was paying more for virtually every agricultural product and additive he uses to grow food. Weed killer has almost doubled to $70 a gallon from a year ago. He’s paying more for potash and sulfur and for the diesel to run his irrigation pumps.

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The Federal Reserve, which is charged with guarding against inflation, has recently treated it as a secondary concern to the economic slowdown and the paralysis in the credit markets. The central bank has lowered interest rates sharply and flooded the financial sector with cash.

And if the core rates of consumer and wholesale inflation remain low despite escalating food and energy costs, the Fed is likely to continue to lower interest rates into the summer, economists said.

Moreover, big increases in producer prices don’t always show up at the retail level, at least in the short run. One reason is that consumer prices are affected by sectors of the economy, including healthcare and services, that aren’t part of the producer price index. In addition, retailers may absorb the first few months of wholesale price increases in an effort to maintain market share.

With the economy slowing down or contracting, businesses will be especially reluctant -- or unable -- to pass higher prices on to consumers, said Joshua Shapiro, an economist with MFR Inc., a forecasting firm in New York.

“Given the weak nature of domestic demand now and going forward, it is unlikely that businesses will have as much success raising prices at the consumer level as they did in the not-too-distant past,” Shapiro said in a newsletter for clients. “Consequently, higher input prices will probably have an increasingly negative effect on profit margins in the months ahead.”

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maura.reynolds@latimes.com

jerry.hirsch@latimes.com

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Reynolds reported from Washington, Hirsch from Los Angeles.


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