Economists say food prices may jump 5 percent in 2011

Maybe it's time to start thinking about planting a garden to grow your own food.

Economists with Wells Fargo Securities believe food prices could increase as much as 5 percent this year due to demand exceeding supply and rising energy costs.

Sam Bullard and Eugenio Aleman, senior economists with the Charlotte, N.C., unit of Wells Fargo, said consumer food prices rose 0.8 percent in December, a major factor in the larger-than-expected 1.1 percent increase in the producer price index released Thursday by the U.S. Department of Labor. The producer price index tracks the wholesale prices of all finished goods.

“Over three-fourths of last month's consumer food price increase could be traced to a 22.8 percent surge in the price of fresh and dry vegetables,” Bullard and Aleman said in their monthly commentary. “Due to weather extremes, such as the floods in Australia and the dry weather in South Africa, the U.S. Department of Agriculture on Wednesday cut harvest estimates for corn, soybeans and other grains.

“Combined with the rising demand we are seeing from the emerging market countries, further sharp increases in the prices for key agricultural commodities are expected this year. We would not be surprised to see food prices rise as much as 5 percent in 2011.”

While conceding that inflation is not an immediate concern, Ballard and Aleman noted that wholesale prices are expected to rise 4.1 percent this year and consumers are likely to see price increases and accelerating inflation as the economic recovery gains traction.

“Right now, excess capacity in the U.S. economy continues to restrain the pass-through of rising raw material costs,” Ballard and Aleman said. ”As the recovery lengthens and demand increases, we could see more pass-through resulting in consumer inflation rising at a faster pace in 2011 and 2012.

An increase in the price of energy required to produce finished goods accounted for 75 percent of the producer price increase in December. The price of heating oil, used by many factories in the northeast United States, rose 12.3 percent and wholesale gasoline prices rose 6.4 percent, marking the third consecutive month of substantial increases.

Absent the jump in energy costs, the wholesale price of all finished products rose a more modest 0.3 percent.