Food costs climb higher, pushing price index up. Summer drought's effect, hike in wholesale prices raise red flag of inflation

As consumers are quickly finding this summer, food prices are clicking upward almost as fast as clerks can rotate their price stampers. This unfortunate fact was confirmed yesterday when the government reported that the consumer price index (CPI) for July rose by 0.4 percent, led by a 1.4 percent jump in grocery store prices.

The upward pressure on the US dollar eased after the report, since foreign-exchange markets had been expecting an even worse inflation number. ``People who were expecting that the Federal Reserve Board would raise interest rates immediately sold their dollar positions,'' explains Brian Fabbri, chief economist at Thompson McKinnon Securities.

In the United States, the bond market staged an early rally, with interest rates falling, and the stock market was mixed in light trading.

Although economists still don't see a dangerous long-term inflation problem for the economy, the latest report ``has a dark side,'' says Robert Brusca, an economist at Nikko Securities International.

What is annoying to economists is that many food companies are using the drought in the Midwest as an excuse to raise prices before some crops are even harvested. ``Every time there is a shortage in an industry, down the road they use it as an excuse to raise prices and then look for a way to make it stick,'' Mr. Brusca complains.

Some grocers are wondering about the price hikes as well. At the Red Apple Companies in New York, John Riley, vice-president for marketing, says the wholesale price of peas is up 20 percent over last year, while canned beans are up 15 percent, corn is up 15 percent, and cereal is up 15 percent. ``I believe the companies are pricing on replacement costs,'' says Mr. Riley, referring to the possible higher prices wholesale companies will pay farmers for corn and other grains later this year.

But some of the sharpest increases can be attributed to the drought. Reflecting hot weather that is tough on chickens, egg prices rose 9.6 percent and poultry prices climbed 7.4 percent in July. Fruit and vegetable prices rose 4.7 percent.

Even in areas not directly affected by the drought, food prices are on the rise. For example, economist Donald Ratajczak of the Georgia State University Forecasting Service, notes that local watermelons normally cost $1.25 each. But since melons didn't develop in the Midwest this year, Southern melons are being shipped in, resulting in a tripling of the price.

Such increases are not going over well with consumers. At a Sloan's supermarket in New York City, Lurline Chin says her family is cutting back on the amount of food it buys. Marilyn Ellsworth, another shopper, complains that ``the price of vegetables is horrendous.''

General Mills, the manufacturer of Cheerios, says the price it pays for oats is nearly twice what it paid last year. But Craig Shulstad, a company spokesman, says other prices are up as well, including a near-doubling of its packaging costs. General Mills, like its competitors, raised prices 5.5 percent in June, following a similar price hike at the end of last year.

While consumers are complaining in the checkout lines, Mr. Ratajczak says policymakers will be less concerned, since there is little that can be done about drought-related price hikes. ``The Federal Reserve Board can buy time from this report,'' he says.

For example, clothing prices fell a sharp 0.6 percent, reflecting summer sales. Energy costs rose only 0.3 percent, largely a result of a 0.7 percent hike in gasoline prices. Excluding food and energy, the price index rose only 0.3 percent, or less than the average monthly increase for the first half of the year. Ratajczak expects food prices will level off in the second half, since many companies have already raised prices in anticipation of higher costs.

Separately, the government also reported that orders for ``big ticket'' durable goods orders fell 7 percent in July.