Rising commodity prices having mixed effects

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.