by Kevin G. Hall

MIDLAND, Va. - The Labor Department's most recent inflation data showed that U.S. food prices rose by 4.1 percent for the 12 months ending in June, but a deeper look at the numbers reveals that the price of milk, eggs and other essentials in the American diet are actually rising by double digits.

Already stung by a two-year rise in gasoline prices, American consumers now face sharply higher prices for foods they can't do without. This little-known fact may go a long way to explaining why, despite healthy job statistics, Americans remain glum about the economy.

Meeting with economic writers last week, President Bush dismissed several polls that show Americans are down on the economy. He expressed surprise that inflation is one of the stated concerns.

"They cite inflation?" Bush asked, adding that, "I happen to believe the war has clouded a lot of people's sense of optimism."

But the inflation numbers reveal the extent to which lower- and middle-income Americans are being pinched.

The Bureau of Labor Statistics said in its June inflation report that egg prices are 19.5 percent higher than they were in June 2006. Over the same period, according to the department's consumer price index, whole milk was up 13.3 percent; fresh chicken 10 percent; navel oranges 19.8 percent; apples 11.7 percent. Dried beans were up 11.5 percent, and white bread just missed double-digit growth, rising by 9.6 percent.

These numbers get lost in the broader inflation rate for all goods and services, which measured 2.7 for the same 12-month period. Across the economy, rising food prices were offset by falling prices for things bought at the mall: computers, cameras, clothing and shoes.

"All of that stuff is going down in price, but prices for gasoline have gotten higher, and food prices have gone up," said Mark Vitner, a senior economist for Wachovia, a large national bank based in Charlotte, N.C.

People also go to the mall a lot less than they go to the grocery store, so they're constantly reminded that dietary staples are up sharply.

Why are food prices rising?

It's partly because of corn prices, driven up by congressional mandates for ethanol production, which have reduced the amount of corn available for animal feed. It's also because of tougher immigration enforcement and a late spring freeze, which have made farm laborers scarcer and damaged fruit and vegetable crops, respectively. And it's because of higher diesel fuel costs to run tractors and attractive foreign markets that take U.S. production.

The Labor Department's last detailed survey of consumer spending, in 2005, showed that Americans spent about 12.8 percent of their income on food. A bit more than 7 percent of their income was spent on food at home, and 5.7 percent was spent on food away from home.

These percentages suggest that higher food prices, while unwelcome, won't break the bank for most consumers. But for retirees such as Jacqueline Wilson, 60, of Upper Marlboro, Md., rising food and fuel prices take a big bite out of fixed income. "I make every dollar count," said Wilson, outside a Giant supermarket. "I cut back. ... I get only as much as I need. I don't buy it because it is 10 for $10, but so that I'm using it and not wasting my money."

Asked about her view of the economy, she answered, "Terrible."

In broad terms, the economy isn't terrible. Unemployment is near record lows, and the second quarter posted a strong 3.4 percent growth rate. But it is for those Americans who are pinched by rising food and gasoline costs, and that's a lot of folks. Half the nation's families earn below the median family income of about $56,000. Three-fifths of American families report income under $70,000.

At the Al-Mara farm in Midland, Va., Jeff and Patty Leonard run a large dairy operation where about 600 cows produce 19,000 pounds of milk each day. They plant about 1,000 acres of corn, so they don't face all of the rising feed costs like some farmers. But they sympathize with consumers because the costs of nitrogen fertilizers and diesel fuel have all gone up sharply, raising production costs by nearly 30 percent.

"That's how your farmer feels here at home when we're trying to buy soybean meal, food for our cows and trying to maintain our equipment," said Patty Leonard. "I can understand exactly what the shopper is going through."

Milk prices aren't set on the farm. That's done by marketing cooperatives, which this year have been successful in passing on higher production costs after several dismal years of prices that took dairy farmers back to the 1970s.

"It's pretty much a realignment of the actual value of milk in today's dollar," Patty Leonard said. "Milk has been cheap for a long, long time."

Globalization also explains higher milk prices. Australia, a leading milk exporter, is struggling through a drought, and European governments are pulling back dairy subsidies. So U.S. farmers, aided by a weak dollar, are stepping in to meet growing demand for milk products in China and India. That's pinched supply at home and abroad, driving up prices.

"U.S. per capita dairy consumption is the highest it's been since 1987," said Chris Galen, vice president of the National Milk Producers Federation, pointing to rising U.S. demand for cheese, made from milk. "Americans are eating more cheese than ever - not just volume but per capita."

To make more milk, or raise more chickens that lay more eggs, farmers need feed corn and other feed products. But corn prices have soared over the past year as Congress pushes ethanol, a renewable fuel made from corn. Fields that previously grew soybeans are now yielding corn, and that's driven up the price of soybeans as they become scarce.

Iowa State University's Center for Agricultural and Rural Development shocked the farm sector earlier this summer with a report that corn farmers are expected to lock in prices of $4 a bushel through 2010, about double what corn fetched two years ago.
"You will probably be seeing these prices rise for quite a long time and stabilizing, maybe, but not going back to the $2-a-bushel corn," said Jacinto Feitosa, co-director of the center in Ames, Iowa.
2007 McClatchy Newspapers