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August 2 , 2007
After several years of moderate food price inflation, food shoppers are seeing much higher food price increases. The food price increases so far in 2007 are almost double the price increases in 2006 due in large part to tight supplies and strong demand for many food products as well as higher energy costs. One reason for tight supplies is that egg, chicken and beef producers have reduced their flocks and herds in reaction to higher feed costs. At the same time, Asian economies are growing strongly and importing more commodities. In particular, US exports of beef to Asia are growing since the export ban due to BSE has been lifted. Looking forward, due to the tight supplies, food prices will depend on weather conditions. Favorable weather conditions for good yields will moderate food prices while weather problems will cause food prices to increase even more. Hurricanes and fall storms can affect fruit and vegetable supplies, while drought in the Midwest can affect feed grain supplies. In addition, food retailers continue to see higher transportation and energy costs that they may pass on to consumers.
Grocery store prices (“Food at Home” in figure 1) rose 4.6% from July 2006 to July 2007, well above the 1997-2006 average annual food and beverage retail price increase of 2.5%. Restaurant prices (“Food Away” in figure 1) are expected to increase at 3.6% for the rest of 2007, above the typical 3% increase. Restaurant prices are not increasing as fast as grocery store prices because the restaurant bill includes the labor to prepare the food and overhead in addition to the higher food costs. One of the big differences in 2007 as compared to 2006 is that both grocery store prices and restaurant prices are increasing faster than general inflation (“CPI less food” in figure 1), which makes the food price increases much more visible.
Over the last 12 months, most food product prices have increased. Rising prices have been lead by eggs which are up 25-30% and milk which is up 25%. Wheat products including bread, pasta and flour are up between 5 and 15% due to the tight world stocks of wheat as a result of poor wheat crops in Australia, Canada, U.S., Ukraine and other parts of the world. Chicken and beef prices are up between 5 and 10% due to a decrease in the chicken flock and cattle herd as a result of the higher feed prices this past year. Prices for fresh fruits and vegetables have been moderating after the higher prices this past winter that resulted from winter storms in Florida, California and Mexico.
Over the next 12 months, I expect food price inflation to continue to lead general inflation. Grocery stores and restaurants are facing both higher food ingredient costs and energy costs remain high. As shown in figure 2, prices of “Crude Foods, Feedstuffs” have increased more than 25% and these higher costs mean that the costs of “Intermediate Foods for Manufacturing” and “Finished Foods” are higher and will remain high until the food ingredient prices moderate.
A printable PDF version of this is available.
Corinne Alexander, Food Marketing Economist
Department of Agricultural Economics
Purdue University
cealexan@purdue.edu
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