Surge in energy prices stokes inflation

On Tuesday, Indonesia became the latest country to clamp down on food shipments out of the country to try to maintain supplies. Rising global prices prompted more farmers to sell their crops at export prices that are nearly double local rates.

The list of other countries that have placed restrictions on food exports in a bid to secure supplies and limit inflation includes Russia, Vietnam, India, Cambodia and Argentina — the latter is the world’s fourth largest wheat exporter. In Bangladesh, economists estimate 30 million of the country’s 150 million people could be going hungry. Haiti’s prime minister was ousted over the weekend following food riots there.

U.S. households spend a smaller part of their budgets on foods than any other country — some 7.2 percent in 2006, according to the USDA. But food costs in the U.S. are rising faster than they have in 17 years. Eggs cost 25 percent more in February than they did a year ago, according to the USDA. Milk and other dairy products jumped 13 percent, chicken and other poultry nearly 7 percent.

“It’s eating into a lot of peoples’ budgets,” said Naroff. “And we’re beginning to see it already in the retail sales numbers.”

All of which leaves policymakers at the Federal Reserve between a big rock and very hard place. After  the housing slump and mortgage mess threw sand in the gears of the credit markets last summer, the Fed began flooding the financial system with money to get things moving again. But it’s a risky move: too much money sloshing around the economy can also feed inflation.

Central bankers are betting that a slowing economy will help take the pressure off demand for goods — which ordinarily would help tame inflation. But if higher energy prices are the underlying cause of higher prices, the Fed has a lot less room to maneuver. Raising interest rates now to fight inflation runs the risk of further damaging to the financial system and global economy.

“There a lot of bad things that are coming together when it comes to inflation but not a lot of them can be effected by Fed policy,” said Naroff. “What’s the Fed going to do — drive the world into recession so the world stops eating?”

For the time being, the best central bankers can do is signal that their rate-cutting days are numbered.  After slashing short-term rates in half over the past nine months, many economists expect the next move to be a relatively modest quarter-point cut when the Federal Open Market Committee meets at the end of the month.

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