Inflation threat looms over Arkansas, U.S. economy

story by Wesley Brown
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As Arkansas’ economy begins to regain solid footing following the longest downturn since the Great Depression, Arkansas consumers now have something else to worry about — inflation.

Arkansans have to dig deeper into the pocket for everything from coffee, ketchup and peanut butter to running shoes, baby diapers and toilet paper. And of course, there is the continuing upward march toward $4 a gallon for regular unleaded at the pump.

On Thursday (Mar. 24), the U.S. Bureau of Labor Statistics (BLS) reported that consumer prices for the month of February 2011 were up 2.11% on a year-over-year basis compared with February 2010.

FED PERSPECTIVE
February’s year-over-year increase of 2.11% was up 29% from January’s year-over-year increase of 1.63% and is now above the Federal Reserve’s informal inflation target of 1.5% to 2%.

Despite those numbers, Federal Reserve Chairman Ben Bernanke has openly downplayed inflation concerns, recently saying “the measures of underlying inflation have been subdued.” The Federal Reserve’s Open Market Committee, which sets the nation’s monetary policy, voted to maintain the status quo at it latest meeting.

“Information received since the Federal Open Market Committee met in January suggests that the economic recovery is on a firmer footing, and overall conditions in the labor market appear to be improving gradually,” the Fed’s board of governors said in a statement after their March 15 meeting.

Specifically, the committee reiterated its existing plan to purchase $600 billion of longer-term Treasury securities by the end of the second quarter of 2011. The board of governors also voted to maintain the target range for the federal funds rate at zero to 0.25%.

“The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to support the economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate,” said the board, which Bernanke chairs.

FOOD, ENERGY PRICE CONCERNS
Greg Kaza, economist for and executive director of the Arkansas Policy Foundation, generally agrees with the Fed’s assessment that the threat of inflation won’t cool the current expansion yet believes rising food and energy prices could be a thorn in the side for the economy.

“It’s possible that rising commodity prices could harm the recovery but there is no evidence the economy is entering a recession,” Kaza said. “The coincident indicators (payroll employment, industrial production, real income less transfer payments and wholesale-retail sales) are more important, and they show expansion.”

Still, some economy watchers in Arkansas and elsewhere are concerned that the Fed’s monetary policy on underlying inflation doesn’t fully take into account food and energy prices, every day pocketbook items for most consumers.

COMMODITY PRICES
Dr. Michael Pakko, chief economist for Institute for Economic Advancement at the University of Arkansas at Little Rock and the Arkansas economic forecaster, has tracked rising commodity prices for at least a few months now.

“The increases are remarkable,” Pakko said, a former staff economist for the Federal Reserve in St. Louis. “The big price increases in food prices began around the middle of last year.”

From his analysis of the International Monetary Fund (IMF) data between July 2010 and February 2011, Pakko said wheat prices are up 120%, corn prices have jumped 92% and the overall IMF commodity food price index is up over 40% over the same period.

The price spikes are not limited to food commodities either.

“Cotton prices have more than doubled. In combination with recent increases in world oil prices, these price hikes pose some significant risks for the U.S. economy,” he said.

The chief economist at The Conference Board agrees with Pakko’s analysis, saying the latest data points to an improving economy through the summer. Yet, U.S. consumer confidence still faces “strong headwinds,” said Conference Board economist Ken Goldstein.

“Headwinds continue to include a still weak housing market and renewed concerns about the negative consequence of high and rising energy and food prices,” said Goldstein. “The net result is likely to be moderate economic growth with an uptick in inflation. This could potentially trim a few tenths of a percent from GDP growth over the next few quarters.”

FUTURE PRICE HIKES
Meanwhile, the list of food and consumer goods companies planning to hike prices continues to grow. Nike, Starbucks, Kraft Foods, Kimberly Clark and Tyson Foods have all recently announced price hikes.

Pakko said those price increases are concentrated in specific commodities and have not spread to the broader economy.

“In each case, there is typically a story (or stories) about idiosyncratic supply and demand conditions that are responsible for the price increases” he said. “Taken as a whole, however, they are likely to have a significant impact on the cost of households’ typical consumption bundles.”

On the other hand, Pakko said the rise in commodity prices have not fully benefitted rice, cotton and other agriculture producers in Arkansas. Beef producers are seeing somewhat better conditions with prices up nearly 27%, he said.

Still, the Arkansas economist expressed some concerns that rising commodity price increases could be a precursor of a more general surge in inflation.

“If you ask Federal Reserve officials about inflationary concerns regarding rising commodity prices, they are likely to mention low resource utilization and ‘well-anchored’ inflation expectations as factors that are acting to prevent an outbreak of general inflation,” Pakko said. “But with the economy recovering, with households facing ever more evident price increases, and the Fed continuing to focus on employment instead of inflation, I see an outbreak of inflation as a very real threat to the U.S. economy.”