Rising Food Prices May Give Bernanke, Central Bankers Heartburn By Rich Miller and Bob Willis Enlarge Image Federal Reserve Chairman Ben S. Bernanke July 16 (Bloomberg) -- Rising prices for food, from yogurt in the U.S. to steak in South Africa, are causing heartburn at the world's most powerful central banks. The fastest increase in food-commodity prices in at least a decade has already led monetary authorities in England, Mexico, Chile and South Africa to lift borrowing costs. It is also sowing doubts about the U.S. Federal Reserve's focus on core inflation, which excludes food and energy, and about China's gradual approach to tightening credit. As Fed Chairman Ben S. Bernanke prepares to deliver his semiannual report to Congress this week, central-bank officials worldwide are anxious that climbing costs may trigger consumer concerns about faster inflation. To keep them from being self- fulfilling, some of the biggest economies might have to push interest rates higher. ``Central banks are more conscious than they've ever been of the danger of allowing inflation expectations to become unmoored,'' says Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other institutions that trade in financial markets. An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded during the last 18 months. ``We haven't seen anything on this scale before,'' says Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development. Triggering Demand The demand, triggered in part by the increasing use of agricultural commodities to make ethanol and other substitutes for crude oil, may keep prices high for years. The OECD sees U.S. output of corn-based ethanol and European consumption of oilseeds for biofuels doubling by 2016. Chinese and Brazilian production of ethanol will expand even faster, it said in a July 4 report with the United Nations' Food and Agriculture Organization. Rising prosperity in China and other emerging nations is also spurring demand, particularly for value-added items such as meat and dairy products, the report said. ``We are sitting on structural changes that will affect agricultural prices for a long time to come,'' Paul Polman, chief financial officer of Vevey, Switzerland-based Nestle SA, the world's largest food company, said last month. Global Inventories The U.S. Department of Agriculture's estimate for global inventories of grain are at the lowest level in 30 years in terms of days of consumption, says Carl Weinberg, chief economist for High Frequency Economics in Valhalla, New York. ``Central banks need to be very alert and learn from other experiences, such as happened in the 1970s,'' Jose Dario Uribe, general manager of Colombia's central bank, said in an interview. Back then, monetary officials were slow to respond to rising prices for oil and food. As a result, U.S. inflation averaged 7.1 percent in the 1970s, compared with 2.75 percent so far this decade. The risk, though, is that inflation could accelerate. Premier Foods Plc, the U.K. maker of Hovis bread, said July 9 it plans to increase prices. German brewers are also raising prices to compensate for the higher cost of barley as farmers switch to crops used for biofuels. General Mills Inc., the second-largest U.S. cereal maker, plans a ``mid-single-digit'' percentage increase in Yoplait yogurt prices, Chief Operating Officer Ken Powell said June 28. That follows a smaller increase in cereal prices earlier in the month by the Minneapolis-based company. Pessimistic Outlook With prices of many everyday items starting to rise, the danger is that consumers and companies will become more pessimistic about the outlook for inflation. ``Nothing affects consumer inflation expectations more than food,'' says Richard Yamarone, chief economist at Argus Research in New York. ``Not everybody has to drive to work, but everybody wakes up and has breakfast.'' The Bank of England suggested in its last quarterly bulletin that price changes on ``highly visible'' items such as food may play a big role in shaping consumer attitudes about rising prices. Bernanke has repeatedly highlighted the importance of those attitudes in carrying out monetary policy. ``The state of inflation expectations greatly influences actual inflation,'' he said in a July 10 speech in Cambridge, Massachusetts. Comfortable Range Joe Carson, director of economic research at AllianceBernstein LP in New York, says rising food prices may keep the Fed on alert, even though the annual increase in the core measure has fallen within the range of 1 percent to 2 percent that some Fed officials have said they're comfortable with. Economists, including some at the Bank of England, have criticized the Fed's focus on core prices, arguing that it ignores the inflationary impact of rapid global growth on commodities such as oil. Fed officials say their long-term objective is to keep overall inflation low. They justify their use of core prices as an intermediate goal because the measure has proven in the past to be a better indicator of underlying price pressures than the broader, so-called headline measure. They acknowledge they've been surprised by the persistent increase in energy prices during the last few years. The core inflation gauge the Fed uses in its semiannual forecasts averaged just 0.1 percentage point less than the headline measure in the past 20 years. In the last three years, though, the gap has widened to an average of 0.6 percentage point. Futures Markets The danger for the Fed is that food prices, too, are on course for a multiyear advance. The futures markets that Fed officials monitor aren't forecasting such a rise; these markets also didn't anticipate the continued increase in oil. Higher food prices pose even more of a danger for China and poorer nations, where consumers spend a greater share of their income feeding themselves. Food accounts for a third of China's consumer price index, more than double the percentage in the U.S. Higher prices for pork, corn and milk helped push Chinese inflation above 4 percent last month, Ma Jun, an economist at Deutsche Bank AG in Hong Kong, estimated in a July 9 note. The actual figure will be released this week and follows a 3.4 percent year-over-year rise in consumer prices in May, the biggest jump in 27 months. Intensifying Pressure Ma says the faster inflation will intensify pressure on Chinese policy makers to take additional steps to slow the economy, including possibly raising interest rates further. ``Past measures are not having much effect,'' says Wang Qian, an economist at JPMorgan Chase & Co. in Hong Kong. She expects 0.27 percentage point increases in lending and deposit rates by year-end. Some central banks aren't waiting. The Bank of England increased rates on July 5 by a quarter point to 5.75 percent, the highest level in six years. Bank policy maker David Blanchflower says higher borrowing costs will anchor inflation expectations amid escalating prices for food and oil. Other monetary authorities are also uneasy, says Turkish central bank Governor Durmus Yilmaz. When policy makers from some 50 nations met on June 24 in Basel, Switzerland, he said in an interview in Istanbul, ``governor after governor all complained about food prices.''