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Increase in Food Costs Boost US Wholesale Prices - 2004-04-22

A big increase in food costs helped push U.S. wholesale prices up sharply during March, which is fueling worries about inflation and inflation pressures could lead the U.S. central bank to raise interest rates sooner than expected.

Thursday's report from the Labor Department showed that prices paid to farms, factories and refineries rose in March. The so-called Producer Price Index jumped 0.5 percent. However, by setting aside the often volatile prices for food and energy, the measure was up a milder 0.2 percent. Economist Joel Naroff, president of Naroff Economic Advisors, comments on the numbers.

"What we saw in the wholesale prices was a continuation of the building pressures on prices that producers are beginning to face," he said. "We've seen that for several months now, and while it has not translated dramatically into higher retail prices, it clearly indicates the stronger economy is having an impact on costs."

The new figures are boosting speculation that the U.S. Federal Reserve might raise interest rates sooner than expected to head off inflation. The Federal Reserve's key lending rate is currently just one percent, a low not seen in over 45 years. The Fed's chairman, Alan Greenspan, gave indications this week that an interest rate hike is in the works, but offered no specific time such a hike might take place. Economist Joel Naroff said that an interest rate increase would not be a bad thing and that rates are bound to go back up.

"The very, very low rates were a result of all the crises we have had, whether it was the dot-com bubble bursting, whether it was 9/11, [corporate] scandals, [or the] Iraq War," he explained. "All of these created hurdles for the economy that caused the Fed to reduce interest rates, and rates in general to decline. The fact that rates would be going up is simply an indication that we have all of these problems behind us, and the economy has moved into a phase where we have strong, sustainable growth."

While analysts try to predict when the Federal Reserve's policy-making committee will vote to raise interest rates, at least one expert wants the Fed to do so soon. Steve Forbes, publisher of the business magazine bearing his name, and a two-time U.S. presidential candidate, explained why he wants Federal Reserve chairman Alan Greenspan to push for a rate hike.

"The American economy is very strong, there is a mild inflation coursing through the economy, we see it in steel prices, we saw it in oil prices, and it is going to hit other sectors," he said. "Inventories are growing again, because people feel they are going to pay more down the road, instead of (the case of) deflation, where you waited and you paid less. I hope the Fed acts sooner rather than later, because the longer he (Alan Greenspan) waits, the harder it is going to be to rein this thing in."

The monetary policy making committee of the U.S. central bank, the Federal Open Market Committee, next meets to consider interest rates on May 4. Whether the committee will raise rates then and by how much, will be the subject of some speculation among analysts and Wall Street investors in the coming days.