Rumblings of inflation grow louder

Be it a bushel of wheat from Kansas, a ton of rice from India or a barrel of crude from Saudi Arabia, prices for all manner of commodities are on the rise across the globe, a trend that is starting to pinch American consumers.

On Tuesday prices of many raw materials continued to surge, with gold, cotton and sugar reaching record highs. A closely watched index of 19 major commodities closed at a two-year high, despite a late-day sell-off in gold and oil.

The effects are rippling from financial trading floors to local stores, forcing consumers to shell out more for everyday basics — a cup of coffee, a box of cereal, a gallon of gasoline.

Those increases are being driven in part by short supplies of some crops and raw materials caused by poor weather in major producing regions and robust demand from emerging markets such as China and India.

Investors and speculators also are pushing up prices as they jump into rising commodity markets. They are being drawn to these so-called hard assets to hedge against inflation and the risk of further devaluation of the dollar and other paper currencies.

But that fear of inflation could ultimately be the fuel that feeds it, analysts warned.

"Billions of dollars are moving into oil, and then it becomes a self-fulfilling prophecy," said Tom Kloza, chief oil analyst for the Oil Price Information Service.

Crude oil prices are up 9% this year to nearly $87 a barrel. Fuel costs directly affect what consumers pay for food.

Take breakfast. This year alone, raw coffee prices on commodity exchanges are up 60%. Corn and soybeans, the basic feed for hogs and cattle, have risen 39% and 26%, respectively. Wheat, a dietary staple for many cultures, is up 33%, and sugar is up 23%.

Even napkins and tablecloths to set the table have grown more expensive to make: Cotton prices have leapt 100% this year, to $1.51 a pound, a high not seen in this country since the Civil War.

This latest run-up in commodities, which began in late August, so far has boosted prices only modestly for consumers. But next year the impact could be far more serious, particularly if harvests for major crops are poor, Wall Street and agricultural analysts warned.

Retail food prices have already started to rise after remaining relatively flat for the first half of the year, said Ephraim Leibtag, an economist with U.S. Department of Agriculture's Economic Research Service.

The agency forecasts that overall inflation for food prices, projected at 0.5% to 1.5% this year, in 2011 will range from 2% to 3%. "But some segments — such as dairy and meat — will be higher than that," Leibtag said.

Now a wide swath of American businesses face a tough task: figuring out how much, if at all, they can raise their prices without scaring off customers in a still-struggling economy.

General Mills Inc., citing higher costs for grain and other ingredients, is raising prices on some of its breakfast cereals this month and some baking products in January. Kraft Foods Inc. said during a call with analysts last week that it had raised or planned to raise prices on about 40% of its products sold in the U.S., including coffee and cheese.

Starbucks said it would charge more for some its larger drinks because the cost of its coffee beans is skyrocketing.

Rival Peet's Coffee & Tea Inc. already has jacked up prices, blaming the run-up in raw coffee. In September, the Emeryville, Calif.-based chain tacked on 10 cents to the price of most of its drinks and 8% to the price of bagged beans sold in its stores.

Citing cotton costs, apparel makers Jones Group Inc., Hanesbrands Inc. and VF Corp. have said they expect to boost clothing prices by as much as 10% early next year.

Still, raw material costs often represent only a small portion of the final retail price of a product, compared with labor, marketing and transportation. And it's unclear whether most manufacturers and retailers — particularly big-box stores such as Wal-Mart Stores Inc. — will risk alienating shoppers by raising their prices significantly.

But some corporate leaders are clear about their intentions.

"The reality is, costs are going up for everyone," Irene Rosenfeld, chief executive of Kraft Foods, told analysts during a quarterly earnings call last week.

Beverly Shafer agrees. The co-owner of Schooner or Later, a popular diner in Long Beach, has watched her supply bills grow by hundreds of dollars a month. Her coffee vendor raised prices 30 cents a pound in October — then announced another 30-cent hike this month.

Her bacon prices have jumped to $77 per box from $47.

"Do you have any idea how much bacon and coffee we go through?" Shafer said. "We've tried not to raise our prices, but we have no choice. We're going to have to do it. Prices have to go up across the board on our menu. We can't keep up."

But even modest price increases are more than some strapped shoppers can bear.

Cheap has become the shopping mantra for Mike Sherry, 34, a Reseda-based radio production director, who stopped by a Target store in Los Angeles on Tuesday.

"I'm really just aware of what place has the best deal," Sherry said.

Higher commodity prices, while a bane for consumers, are a potential bonanza for investors and traders. They are being drawn to raw materials as a way to diversify their portfolio holdings, alongside stocks, bonds, real estate and other assets.

The appeal stems in large part from the U.S. government's decision to allow the dollar to weaken in the global economy. The greenback's value has tumbled against other major currencies by more than 12% since June. The Obama administration has favored a slumping dollar as a way to bolster economic growth by making American exports cheaper for foreign buyers.

That has had two effects. First, because most commodities are priced in dollars worldwide, a falling greenback means raw materials become cheaper for countries with stronger currencies. That stokes demand.

Second, cheapening the dollar drives some global investors and speculators to seek out assets that will hold their value or rise. Commodities can fill that bill.

"A common view now is that it's better to own a hard asset than a piece of paper [currency]," said Adam Sieminski, a veteran commodities analyst at Deutsche Bank Securities.

Yet many analysts don't believe that serious inflation can take hold in the U.S. as long as unemployment remains high and businesses and consumers remain cautious about spending.

Even as commodity prices have jumped this year, the "core" U.S. consumer price index, meaning prices excluding food and energy, was up just 0.8% in September from a year earlier, the smallest increase since 1961.

In fact, the Federal Reserve, fearing that the weak U.S. economy could tip into deflation — a broad-based decline in prices and wages — last week agreed to pump an additional $600 billion into the financial system by June, hoping to underpin growth and lift inflation modestly.

The central bank's assumption is that if consumers believe inflation might be higher in a year they should be more willing to spend money now rather than wait in the hope of getting lower prices.

But the Fed's move has stirred anger among many of America's trading partners, including China, Germany and Brazil, who see it as an attempt to further weaken the dollar at the expense of their exports. That has set the scene for potentially contentious discussions between President Obama and other world leaders gathering for the G-20 summit in South Korea this week.

What's more, although official U.S. inflation rates remain subdued, rising inflation already is vexing many fast-growing Asian economies, spurring their central banks to begin tightening credit even as the U.S. seeks to loosen it further.

Mihir Worah, who manages a $20-billion commodities investment fund at Pimco in Newport Beach, said the Fed now faced a delicate balancing act in actively trying to boost U.S. inflation, with raw material prices already rising sharply,

"The Fed wants people to believe that more inflation is coming," he said. "But if enough people believe it, it could have the wrong impact" on commodities.

p.j.huffstutter@latimes.com

tom.petruno@latimes.com

Times staff writers Nate Jackson and Ronald L. White contributed to this report.

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