From Farming to Fashion, Inflation Looks to Be on Its Way

The food on your plate, the gas in your tank, the plastic in your children's toys and the clothing on their backs are likely to get more expensive in the coming months in a spurt of inflation that could play havoc with the economic recovery.

Consumers haven't yet felt many cost increases in their daily and weekly lives, thanks to companies' skittishness when it comes to raising prices amid widespread unemployment, but evidence is growing that inflation is working its way to store shelves and Americans' wallets.

The Labor Department today said that wholesale prices for finished goods rose 0.8 percent in January, the fastest monthly increase in more than two years. But the prices of intermediate and crude goods yet to be assembled or processed climbed even faster.

The steep increase in how much Americans pay for gasoline -- up 6.9 percent at the wholesale level -- was a big factor, as well as the quickly rising costs of diesel fuel and home heating oil.

Still, the core producer price index, which strips out volatile energy and food prices, also clocked in at a rapid pace of 0.5 percent for the month. That was in part because of a surge in the cost of preparing pharmaceuticals, while the prices of plastic products also rose quickly.

But the real inflation threat seems to be coming from higher up the pricing pipeline.

At the level of crude materials such as animal hides and steel scrap, the core price index rose a whopping 4 percent, outpacing acceleration in energy costs. Cotton costs are on the rise and iron and steel costs are surging -- the result of growing demand around the world.

Food, in particular, is a worry. At the crude level, prices are rising quickly on everything from slaughtered cattle to hayseeds and oil seeds.

One reason: Extreme weather destroyed crops around the world and contributed to a rash of food shortages in recent years, so the value of good farmland has been surging.

The value of irrigated land rose 14.8 percent last year, and nonirrigated farmland was up 12.9 percent, according to a study from the Federal Reserve Bank of Kansas City, which oversees monetary affairs from Missouri to Oklahoma and west through the mountain states of Colorado and New Mexico. Ranch land values were up 9.2 percent

"Rising farm income, especially for crop producers, drove nearly 20 percent annual value gains for Kansas and Nebraska farmland," the KC Fed said.

Thus far, vendors have been reluctant to pass their own rising costs on to their customers at a time when consumer spending has yet to fully recover from the recession, and especially when the job market remains so frail and unemployment so high.

But their eroding profit margins are eating away at that reluctance.

Though executives and bankers in the New York region reported "increasingly widespread hikes in input prices, but more subdued increases in selling prices," a third of respondents "indicated plans to raise prices in the next six months," according to a nationally watched monthly survey from the New York Fed.

The Federal Reserve itself, which has kept its benchmark interest rate near zero for more than two years, has repeatedly said it isn't worried about inflation.

But disagreement over the issue within the Fed may be growing.

The "thing we're looking at is a lot of anecdotal reports suggesting that firms are looking to the second half of this year to make up for" how production costs have squeezed their profit margins, Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, said in an interview on Bloomberg Television. "It's this time in the recovery where the potential for accelerating inflation is highest."