Consumer prices continue to rise

This is not surprising. From MSNBC News:

WASHINGTON - Consumer prices pushed higher last month as increases in energy, food and airline tickets overwhelmed the biggest drop in clothing prices in nearly a decade.

The Labor Department reported Wednesday that consumer prices rose 0.3 percent in March after being unchanged in February.

Core inflation, which excludes food and energy, posted a 0.2 percent rise last month. Both the overall increase and the rise in core prices were in line with analysts’ expectations.

Over the past 12 months, inflation is up by 4 percent, reflecting relentless gains in energy costs, which are up 17 percent over that period, and food prices, which are up 4.4 percent.

For individual food items, the gains are even more stark, with the price of bread up 14.7 percent over the past year and milk prices up 13.3 percent over the same period.

We are now seeing the effects of increased energy costs now being reflected with the higher prices of food. Food needs to be transported from the farms, to the manufacturing facilities for processing, and finally to the grocery stores for consumers to purchase. There are transportation costs--through both railroads and trucks--that need to be added into the price of food items. And those transportation costs include the use of diesel fuel and gasoline needed by train engines and trucks to haul those very same food items from the farms and factories, to the stores. And since energy costs have been rising, this increase in energy costs are cutting into the profits of farms, factories and retail outlets that produce and sell food. That is why both food prices are rising, and why we are seeing this 4 percent jump in inflation.

Now I also saw this interesting MSNBC article on oil prices topping a $115 a barrel:

NEW YORK - Crude futures rose past $115 Wednesday for the first time, propelled by concerns about how much gas will be available during the peak summer months.

In its weekly inventory report, the Energy Department’s Energy Information Administration said inventories of gas fell by 5.5 million barrels, much more than analysts surveyed by Dow Jones Newswires had expected. Light, sweet crude for May delivery responded by rising as high as $115.07 on the New York Mercantile Exchange, and later was up $1.15 at $114.94 a barrel.

The report said crude inventories fell by 2.3 million barrels last week, compared to the gain analysts expected.

But the market was torn and traded sharply lower at times by data deeper in the report showing that the country’s appetite for increasingly expensive gas is declining.

“Demand for gasoline is terrible,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. Gas demand has fallen an average of 1 percent each of the last four weeks compared to the same period last year. “Demand should be rising this time of year.”

Still, May gasoline futures rose 5.39 cents to $2.9349 a gallon on the Nymex after earlier rising to a trading record of $2.9427.

The EIA report also said inventories of distillates, which include heating oil and diesel, unexpectedly rose last week by about 100,000 barrels. Analysts had expected a sharp decline. May heating oil futures rose 0.73 cents to $3.2812 a gallon.

Demand for gasoline has been falling for months as consumers reacted to a series of price records by driving less. The national average price of a gallon of regular unleaded gas rose 1.3 cents Wednesday to a record $3.399 a gallon, according to a survey of stations by AAA and the Oil Price Information Service. That’s 53 cents higher than a year ago, and is expected to keep climbing along with futures prices and as the summer driving season draws near.

A couple of interesting points here to note. First, the demand for gas is declining. As gas prices approach $4.00 a gallon, consumers are reacting to the price increase by driving less and consuming less gas. Energy analysts have been expecting demand for gas to increase as the summer driving season approaches. What will happen is that oil companies and refiners will cut back on production of fuel, both to reduce the unexpected increase in the supply of heating oil and diesel fuel, and to keep the fuel prices at their current levels. If consumer demand for gas increases during the summer driving season, you can bet that gas prices will shoot up due to both the potential increasing demand, and the reduction of the supply by the energy producers. At this point, I can say that here in the San Jose Bay Area, gas prices are now at around $3.80--$3.90 a gallon for the regular gas, and around $4.00--$4.15 a gallon for the premium stuff. If energy prices continue to increase at the beginning of summer, I think we're going to see gas prices shoot up to over $4.00 a gallon for the regular stuff here as the Memorial Day weekend begins.

The second point here is that energy costs are still rising. Oil prices topped $115 a barrel, breaking even more price records. Granted, the price dropped back down to only $114.94 a barrel, but you can look at this chart on how the price of light, sweet, crude oil has shot up since February of this year:

Futures price of light, sweet, crude oil over the past two years. From StockCharts.com

Why have energy prices shot up since last February? I found this interesting Raw Story article that may provide a partial answer to the increase in oil prices:

The number of Iraqis killed in February rose by 33 percent over January, reversing a six-month trend of reduced violence, in a setback to the US military plan to curb the bloodshed ravaging the country.

The combined figures obtained by AFP from the interior, defence and health ministries showed that the total number of Iraqis killed in February was 721, including 636 civilians, compared with 541 dead in January.

It reverses the six-month trend of a steady fall in casualties across the country on the back of a massive US and Iraqi military assault, mainly targeting Al-Qaeda in Iraq.

The February death toll is up after a steady fall in the preceding six months. The monthly tolls were 541 in January, 568 in December, 606 in November, 887 in October, 917 in September and 1,856 in August.

The number of people wounded in February was 847.

The jump in February's toll seems to have been caused by two major attacks during the month.

On February 1, at least 98 people were slaughtered when a female suicide bomber blew herself up amid a crowd of pet lovers in Baghdad's popular al-Ghazl animal market.

And in another brazen attack last Sunday, at least 48 people were killed when a suicide bomber blew himself up in a crowd of pilgrims at a rest stop in the town of Iskandiriyah, south of Baghdad.

Violence in Iraq had increased during February, 2008. Toss in the Maliki government's failed crackdown against the Mahdi Army in Basra near the end of March, I'd say that the Iraq war premium on oil futures had dramatically increased over the past couple of months. And if the violence in Iraq continues to increase over the course of this year, then oil prices, gas prices, and consumer prices will all continue to increase.

Expect more inflation.