U.S. food prices may be headed for a sustained bout of inflation

U.S. food prices may be headed for a sustained bout of inflation, a Dallas Federal Reserve Bank researcher said on Tuesday, citing data on brand-named foods such as Campbell's (CPB.N) soup and Kellogg's (K.N) Frosted Flakes.

Prices for "more-processed" foods rose at an annualized 5.2 percent rate in January and February, compared with a decline of 0.9 percent in the first six months of last year, Dallas Fed senior economist Jim Dolmas said in the bank's latest Economic Letter.

Those prices are a more comprehensive gauge of future good price trends than overall food prices, Dolmas argued.

That's because producers of brand-named foods change prices less frequently than do makers of raw foods, and therefore incorporate a forward-looking view of food costs when they do set prices, he said. As prices of more-processed foods go, Dolmas wrote, so go overall food prices.

"A sustained period of higher food price inflation may be in store for U.S. consumers," he concluded.

Dolmas' focus on a subset of food prices to predict overall food price trends mirrors the Fed's use of core inflation, which excludes sharply higher food and energy prices, to anticipate overall inflation.

The Fed's decision to continue to pump liquidity into the U.S. economy late last month rested heavily on its view that recent commodities price increases are likely to be transitory.

Some analysts have criticized the Fed's focus on core inflation, and have suggested it should pay more attention headline inflation, which is rising much faster.

Dolmas -- whose boss, Dallas Fed President Richard Fisher has warned the Fed's super-easy monetary policy may be fueling future inflation -- defended the idea of a "core" inflation index.

"The idea that one can learn more about inflation by ignoring some of its components is certainly counterintuitive," Dolmas wrote. Still, he said, "Core inflation measures, to greater or lesser degrees, have this trend-tracking property."