WASHINGTON (Reuters) - Steep food and fuel prices that are taxing global consumers and handcuffing recession-wary central bankers threaten to seep deeper into export channels, triggering a worrisome second round of global inflation pain.
The symptoms of price pressure are easy to spot. In Japan, shoppers are cutting back on potato chips and beer. More Americans are forgoing luxuries such as dining out at steak restaurants. In China, the price of pork is up nearly 60 percent. Europe's retail sales have slowed.
The causes are also clear. Oil prices topped $100 a barrel on Tuesday. Grains and other commodities are setting record highs, powered by demand for biofuels and from fast-growing economies including China and India.
The U.S. consumer price index for January was up 4.3 percent from a year earlier, slightly higher than economists had expected. China's consumer inflation rate jumped to 7.1 percent last month, an 11-year high.
"With grains prices soaring, energy costs high, and iron ore set to jump after Brazil's Vale increased prices by 65 percent over 2007, there appears no relief on the horizon for the Chinese people on food, gasoline or durable goods like refrigerators," said Andrew Busch, global foreign exchange strategist with BMO Capital Markets in Chicago.
Globalization closely ties world markets. Soaring Chinese pork prices not only make meals costlier in China, but they could lead to demands for higher wages that eventually translate into rising prices for exported toys, clothing, furniture, electronics and countless other items.
Wednesday's U.S. inflation report showed strong price increases on a distressingly wide range of products, including the usual culprits of food and fuel as well as apparel, prescription drugs and tobacco.
Global food prices in particular will probably remain high as emerging markets move up the food ladder, demanding more meat -- and the grains to feed the livestock. The Reuters/Jefferies CRB Index of commodity prices hit a record high for a fourth straight session on Wednesday.
Despite assurances from U.S. Federal Reserve Chairman Ben Bernanke that inflation will cool as the economy slows, investors in U.S. government bonds are betting that pricing pressure will persist. Yields on longer-dated Treasury bonds have spiked in the past week, reflecting mounting inflation worries as the Fed cuts interest rates to prop up the economy.
Rising yields on the benchmark 10-year note in turn threaten to deepen the economic gloom by lifting mortgage interest rates and undermining demand in the struggling U.S. housing market. Mortgage applications tumbled 22.6 percent last week.
Where inflation spreads is tricky to predict. A key question: How long China will absorb rising costs and shrinking profit margins rather than risk losing consumers in the United States, where it sold $320 billion worth of goods last year?
Merrill Weingrod, who advises companies doing business in China, said Chinese suppliers grappling with increased costs for raw materials and labor were beginning to pass along those expenses to U.S. importers.
However, companies such as Wal-Mart Stores Inc that have the clout to dictate prices are still extracting low-cost goods from China.
U.S. Commerce Secretary Carlos Gutierrez said China was loathe to jeopardize its booming trade with the United States.
"They're not going to keep that (U.S. business) and grow it if they're just passing on price increases," he said in a Reuters interview on Tuesday. "If their prices get out of whack, there are other countries that today are competing with China, in their region and in other parts of the world."
Still, recent economic data suggests that the United States is starting to import inflation. In January, prices for U.S. imports rose 1.7 percent, more than four times as much as analysts had expected, largely because of pricey oil.
Inflation is outpacing U.S. wage growth, putting another drag on household budgets already constrained by the housing rut and tightening credit conditions. Retailers ranging from consumer electronics chain Best Buy to department store owner Macy's have posted disappointing results as consumers cut back on nonessentials.
With higher prices eroding consumers' spending power and undercutting economic growth, central bankers are in a bind. While lower interest rates lift economic growth, they also tend to spur inflation.
U.S. rates will probably fall further as recession fears grow, but Japan's central bank is not expected to raise interest rates to curb the inflationary pressure because of concern about the U.S. economy tanking global growth.
While the European Central Bank has deep concerns about inflation, it signaled earlier this month that it may lower rates this spring.
In China, the story is different. BMO's Busch noted that inflation persisted even though China had allowed its yuan currency to appreciate more quickly in January.
"This leads one to believe that the People's Bank of China will again use some form of monetary lever to raise costs of money to slow the economy," he said.
Additional reporting by Nicole Maestri in New York; Editing by Tom Hals