Rapidly rising commodity prices are beginning to have a marked impact on
inflation, real spending and the external trade balance. Over the past six months,
agricultural commodity prices have increased by more than 60%. The rise in
energy prices has been more muted, but the effects of that increase tend to feed
through more quickly. Headline inflation rebounded to 1.5% in December and
over the next few months will accelerate to 2%. Higher prices for basic goods
will hit real incomes and consumption, offsetting some of the boost from the new
payroll tax cut. Finally, higher food prices are proving to be a boon for the trade
deficit since the US is a net exporter of agricultural products.
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