Midwest floods feed grain price inflation

With the rise in grain prices showing no signs of letting up, investors have flocked to futures markets, adding further upward momentum to prices, according to Jonathan Barratt, who follows the grain markets at Commodity Broking Services in Sydney, Australia.

“Over the last six to eight months we’ve seen a lot of speculative money move into (farm commodities,)” he said. “With the speculators in the market that’s added weight to the movements and adding to the volatility.”

Just as high oil prices are spilling over into the prices of a long list of goods and services, higher grain prices also are putting upward pressure on other food products. The worry is that rising prices of these two critical raw materials will add further pressure to inflation.

That is making life even tougher for the Federal Reserve as it tries to keep interest rates low enough to revive a sagging economy without risking another outbreak of 1970s-style inflation. Fed policymakers hold their two-day midyear meeting next week and are expected to hold interest rates steady, due in part to the rising inflation.

“It pays for people to ignore the inflation when they’re worried about (economic) growth,” said Brian Wesbury, chief economist at First Trust Advisors. “But I’m not one of them: I’m very worried about this inflation. The core rate is accelerating, and so is the overall rate of inflation. So I just can’t see how people wouldn’t be worried about inflation.”

The hope is that a weakening economy will prevent inflation from becoming entrenched —allowing the United States to dodge another round of slow growth and high inflation that persisted through the 1970s, the worst economy since the Great Depression.

So far, inflation appears to be contained. Tuesday’s report on wholesale prices showed that after stripping out energy and food prices, which can swing widely from month to month, the so-called “core” rate of inflation rose 0.2 percent in May, down from a 0.4 percent increase in April.

One critical element that’s missing this time around from the classic “wage-price” inflationary spiral is a rapid increase in wages. So far, wages have not kept up with rising prices — one big reason that many U.S. consumers feel so gloomy about their personal financial outlook.

Those relatively tame wage increases also give the Fed some breathing room as it tries to head off raising rates to fight the rise in inflation.

“Labor costs are very weak,” said Joe LaVorgna, a senior economist at Deutsche Bank Securities. “I do believe that once this commodity story plays itself, you will see a lower headline inflation. And I hope the Fed doesn’t raise rates because I don’t believe housing market can take it, and I certainly don’t believe the credit markets can take tightening."

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