Overall inflation is tame according to U.S. government figures. Indeed, the so-called core annual inflation rate -- stripping out energy and food prices -- has remained at a comfortable 2.5% to 3%.
consumers -- and investors -- can we strip out energy and food prices? I say no -- especially given what's happening with those prices.
The rising trajectory of energy prices is well known, and the pain is part of our everyday experience. But what about food?
Though hardly matching the 50% rise in gasoline prices this year, food prices rose an estimated 7.3% just in this year's first quarter.
Did you notice? Maybe, maybe not. But these increases far outpaced inflation as a whole. And like increases in energy prices, they're likely to have some effects -- good or bad -- on your investments.
Before going there, it's helpful to understand why food prices are going up. The first and biggest reason is ethanol. Ethanol has driven corn prices up 70% in a year, though they've leveled off recently. Higher corn prices mean more land is planted in corn -- and less in everything else -- sending the other commodities higher. Higher corn prices also mean higher prices down the food chain, for the meat of animals that eat it, such as beef, chicken and pork. Finally, corn is the main ingredient in a large array of packaged food, so those prices also increase.
Want more? Check out TheStreet.com TV video.Jennifer Openshaw details stock picks in the food industry.
Energy costs, on the whole, also hit hard. Think about how much energy is used to plant, fertilize, and harvest a crop -- not to mention to get it to market. And finally, there's the China/India syndrome -- higher worldwide demand for foodstuffs, such as energy, drives prices higher.
So how do higher food prices affect your investments?
Just like with energy stocks, they will help some investments and hurt others. There will be winners and losers, depending on whether a company consumes or produces the product. But more than that, I see winners and losers being separated by pricing power -- that is, by how effectively they can pass their cost increases on.
The ability to control pricing in any marketplace is a crucial value-investing parameter. Companies with a strong enough marketplace position -- few competitors, strong brand, strong distribution channels -- will be able to pass on cost increases. Firms with intense competition or little to distinguish them in the market will not.
So here's how I sort out winners and losers in today's food-price environment:
- Packaged-food companies. Food giants such as Kellogg's (K) - Get Report and General Mills (GIS) - Get Report can under most conditions pass on price increases -- because there are relatively few producers and they have established brands. I do fear, however, that many of these products are already so sky-high that consumers might resist -- or that other smaller producers or generic substitutes might gain market share.
- High-end restaurants and outlets. If you're already charging $39 for a filet mignon, it's probably not hard to pass on an increase. So the high-end players such as Morton's (MRT) and Ruth's Chris (RUTH) - Get Report should come out okay -- as will competitors such as PF Chang's ( PFCB) that are not too tightly tied to the meat and dairy industry.And then there's Starbucks (SBUX) - Get Report. This company has seen a share-price drop of almost 30% this year -- at least a good part of which is attributed to higher milk prices. Starbucks did raise its prices last year, so another immediate increase is probably not in the cards -- but long term, milk isn't that big of a deal, and this company's brand and pricing power will prevail over rising milk costs.
- Farm suppliers. This one's fairly obvious: Higher crop prices bring more plantings and more prosperous farmers, which can (and has) helped farm suppliers such as Monsanto (MON) and Deere (DE) - Get Report.
- Fast-food restaurants. In all of this, I see fast food restaurants and restaurant operators, such as Yum Brands (YUM) - Get Report and Chipotle (CMG) - Get Report, as most vulnerable. Margins are tight to begin with, and with the competitive environment, it'll be hard to pass costs on. Look for menu changes or other, more severe signs of pain.
- Grocers. Likewise, conventional grocers such as Kroger (KR) - Get Report are vulnerable -- competition from Wal-Mart and similar superstores may saddle grocers with costs they can't absorb or pass on.
Like energy, food inflation gives plenty of food for thought -- not only for our wallets but also our investment portfolios.
Jennifer Openshaw, a passionate advocate for helping Americans improve their finances and build their personal fortunes, is author of the hit new book
The Millionaire Zone
The Millionaire Zone, and
AOL's Personal Finance Editor. In addition to appearing regularly on such shows as Oprah, CNN and Good Morning America, Jennifer is host of ABC Radio's
Winning Advice and serves as an adviser to some of America's top corporations. Visit her at