The media largely ignored the 1.3 percent rise in the finished goods index reported for February. The monthly data are always erratic, and this increase was driven largely by jumps in food and energy prices, but even the core index rose by 0.4 percent. Furthermore, I'm beginning to think that some of the food price increases are not just random, but actually suggest an upward trend in food prices. Food prices in the finished goods index are up by 6.8 percent over their February 2006 level. They are up by 18.9 percent in the core goods index. Of course higher prices for agricultural goods is an explicit goal of U.S. trade policy, perhaps it is working. (A falling dollar will also raise food prices.) In addition to higher food prices putting upward pressure on prices, the slower pace of productivity growth over the last 10 quarters also puts upward pressure on prices, as will the declining dollar. This is all big news because of the Fed's strong commitment to low inflation (mistaken in my view). If inflationary pressures really are mounting, then the Fed will be more reluctant to lower interest rates even in the face of growing evidence of economic weakness.
--Dean Baker
