Food Prices May Give Bernanke, Central Bankers Heartburn

Rising prices for food, from yogurt in the U.S. to steak in South Africa, are causing heartburn at the world's most powerful central banks. The fastest increase in food-commodity prices in at least a decade has already led monetary authorities in England, Mexico, Chile and South Africa to lift borrowing costs. It is also sowing doubts of prices about the U.S. Federal Reserve's focus on core inflation, which excludes food and energy, and about China's gradual approach to tightening credit. Central banks are more conscious than they've ever been of the danger of allowing inflation expectations to become unmoored,'' says Louis Crandall, chief economist at Jersey City, New Jersey-based Wrightson, a unit of ICAP Plc, the world's largest broker for banks and other institutions that trade in financial markets.

An unprecedented surge in global demand is behind the 23 percent rise in food prices that the International Monetary Fund recorded prices during the last 18 months. ''We haven't seen anything on this scale before,'' says Martin von Lampe, an agricultural economist in Paris at the Organization for Economic Cooperation and Development. The demand, triggered in part by the increasing use of agricultural commodities to make ethanol and other substitutes for crude oil, may keep prices high for years. The OECD sees U.S. output of corn-based ethanol and European consumption of oilseeds for biofuels doubling by 2016.

Chinese and Brazilian production of ethanol will expand even faster, it said in a July 4 report with the United Nations' Food and Agriculture Organization. Rising prosperity in China and other emerging nations is also spurring demand, particularly for value-added items such as meat and dairy products, the report said.

''We are sitting on structural changes that will affect agricultural prices for a long time to come,'' Paul Polman, chief financial officer of Vevey, Switzerland-based Nestle SA, the world's largest food company, said last month. With prices of many everyday items starting to rise, the danger is that consumers and companies will become more pessimistic prices about the outlook for prices inflation.

The Bank of England suggested in its last quarterly prices bulletin that price changes on ''highly visible'' items such as food may play a big role in shaping consumer attitudes about rising prices. Bernanke has repeatedly highlighted the importance of those attitudes in carrying out monetary policy. ''The state of inflation expectations greatly influences actual inflation,'' he said in a July 10 speech in Cambridge, Massachusetts.