Food For Thought — General Mills Raising Prices, Shrinking Cereal Boxes

• E-mail Terry Keenan

What's the connection between Lucky Charms and the Dow Jones Industrial Average? Well, lately the price of one has been going up, while the price of the other has tumbled.

Last Tuesday, General Mills announced that it was raising prices on its cereals — including Lucky Charms, Cheerios and Chex — by shrinking the size of the box. In other words, far fewer green clovers for the buck. On that very same day, Wall Street seemed to have found religion when it came to the building forces of inflation; the market began a three-day swoon that took the Dow down 410 points. Since then, inflation and interest rate worries have continued to batter stocks around the globe.

A coincidence? Maybe, but when it comes to everyday items, the price of a box of cereal ranks right up there with a gallon of gas as a key cost-of-living barometer for the average U.S. household.

And the price of cereal is going up, way up — right along with just about everything else in your grocery cart. In fact, retail food prices are heading for their biggest annual increase in more than a decade, up almost seven percent since the start of the year, compared with just a 2.1 percent rise for all of 2006. If prices continue to rise at this pace, it will be the biggest year for food price increases since 1980.

The push for bio-fuels, led by ethanol, is a big reason behind the runaway food prices. Ethanol now consumes 18 percent of the nation's corn supply (up from 10 percent five years ago) — and that has corn prices through the roof. The growing middle classes in India and China have put pressure on prices as well.

The bottom-line is that food price increases can now be found in almost every aisle: eggs are up 18 percent from a year ago; bread, eight percent; milk, 13 percent; and orange juice, 33 percent. With food accounting for about 15 percent of the average household budget — compared with just seven percent for gasoline — food inflation packs quite a punch.

Which brings us back to Wall Street and the inflation fears stalking the stock market. With fuel and food prices rising far more than the official consumer price index numbers, it's becoming increasingly difficult for Bernanke and Company to rationalize that it's only the so-called core rate of inflation (minus food and fuel) that matters. Indeed, last month the head of research at the Dallas Fed warned that such a practice makes the Fed look like it is out of touch with average Americans.

Whether or not it had anything to do with General Mills raising its prices last week, Wall Street and the Fed are now clearly on inflation watch, and long-term interest rates are marching toward their biggest one-month pop in years.

Even bond guru Bill Gross of PIMCO — the man who controls more IOUs than anyone in the world — got in on the act last week, warning that U.S. inflation is likely to accelerate over the next few years.

Was Gross also channeling Alan Greenspan, who is now a highly-paid consultant at PIMCO? Hard to tell, but for Greenspan, who has been getting a lot of heat for his prognostications lately — who better than Bill Gross to get his message across.

Either way, whether you're feeling it at the breakfast table, or in your portfolio, inflation is starting to bite. Just some food for thought.

Terry Keenan is anchor of Cashin’ In and is a FOX News Channel business correspondent. Tune in to Cashin' In on Saturdays at 11:30am and find out what you need to know to make your money grow and keep what you already have!