Smith Faculty Opinion Article	October 17, 2007
By Dr. Peter Morici, Professor of International Business E-MAIL WEB SITE

Consumer Prices Increase 0.3 Percent in September
Food Prices Continue to Soar

Today, the Labor Department reported that the Consumer Price Index rose 0.3 percent in September because of continuing pressures from rising food prices and a very modest rebound in consumer energy prices.

Inflation remains modest, despite rising crude oil prices. Throughout the supply chain, from oil refineries to florists, businesses face strong buyer resistance to the pass through of higher oil and material prices. Businesses have been obtaining higher labor productivity, and using part of those gains to absorb higher energy and other material prices and holding back on wage increases.

The most significant problem remains food prices. Food prices were up 0.5 percent, after rising 0.4 percent in August. Food prices are up 4.4 percent over the last 12 months.

Corn prices are being pushed up by the federal ethanol program and demand in China for grains, livestock and dairy products.

In the United States, surging corn prices and demand for imported foodstuffs in China are pushing up prices for other grains and derivative products like poultry, beef and baked goods.

Federal policy to cope with oil import dependence is clearly pushing up food prices, and Chinas undervalued currency, which puts its exports and demand for foodstuffs on steroids, is exacerbating food price inflation in the United States.

Short of throwing the U.S. economy into a recession, Federal Reserve policy aimed at controlling inflation is impotent in the face of these forces.

Energy prices rose 0.3 percent in September, after falling 3.2 percent in August and 1.0 percent in July.

Oil prices are receiving a strong push from rapid growth in China. However, U.S. retail gasoline prices are not responding. From April to September, the spot price for oil rose from $63.45 per barrel to $79.91, but the average price of gasoline fell from $2.89 per gallon to $2.85. The recovery of refinery capacity from earlier shutdowns and consumer resistance to higher gas prices are breaking energy inflation. In September, the consumer price index for gasoline did rise 0.4 percent, but this is slight compared to 1.7 and 4.9 percent declines the previous two months.

In September the core CPIconsumer prices less energy and foodrose just 0.2 percent, after rising 0.2 percent in August.

Since June 2006, core consumer prices have risen 2.1 percent. This pace is above Ben Bernankes target range of one to two percent, but the pace of core inflation has not been accelerating.

Higher oil and food prices are simply not fueling broader inflation in the United States, as the subprime meltdown and pull back in housing prices are making consumers more cautious about how they spend their money. Also, after of months of reeling from higher gas prices, consumers are adjusting their habits. That will have broad consequences for both the housing and auto markets in the months ahead and 2008.

Overall, Ben Bernanke will remain preoccupied with the impacts of the subprime crisis on broader credit markets and the risk of recession--that risk remains in the range of 40 to 50 percent. However, with oil prices continuing to soar, businesses cannot resist passing through higher costs indefinitely. Bernanke will have to keep a jaundiced eye on inflation for quite some time to come.

Look for Bernanke to cut the benchmark federal funds rate when the Federal Reserve Open Market Committee October 30 and 31.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.