Overall consumer prices for Houston- area residents and others are not rising as much as some had feared.
According to the Producer Price Index, wholesale prices were unchanged in August following a 0.2% increase in July. This indicates that, overall, companies are paying no more for goods in August than in the previous month, translating into less debt and less cash outflow for many capital- strapped businesses.
One factor that placed upward pressure on wholesale prices last month was food. Food prices in August rose 1.1%, the largest food price increase since February, 2011. The upward trend in food prices was especially noticeable in specific categories such as eggs and processed fruits and vegetables. Eggs jumped an alarming 11 percent in August while fruits/vegetables increased 2.2%. The increase in fruits/vegetables was the largest monthly increase since February, 1990.
Food prices have been extremely volatile this year and drought conditions are the main culprit. Corn, for example, is selling for nearly double what it cost in the summer of 2010. Higher prices for grains means higher prices for feeding livestock and this is largely to blame for the surprising increase in the cost of eggs. Higher corn prices tend to place upward pressure on many food prices, since corn is used in the processing of so many edible products.
Still, the increase in food prices was not enough to push overall prices higher in August and the reason is mainly due to declines in energy prices. Energy prices are tapering off following a sharp increase in relatively short time. Gasoline prices peaked nationwide at about $4 per gallon in May, 2011 but have since fallen back to a recent average of about $3.60 to $3.65 per gallon. Present prices are still much higher than a year ago, but energy prices are trending lower.
Inflation was a concern earlier this year, but inflation fears appear to be easing. The Producer Price Index has increased 6.5% in the past twelve months, driven upward mainly by food and energy prices. This is much larger than the changes last year, but the trends are lower and inflation worries are shrinking. Lower inflation means less financial pressure on consumers and it increases the chances that the Federal Reserve will keep interest rates low in order to stimulate economic growth.
Predictions for the remainder of 2011 call for continued declines in energy prices and continued increases in food prices. The effects of the 2011 drought have not been fully realized and when they are, food prices will have nowhere to go but up.
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