Food-price inflation shows signs of slowing

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The run-up in food prices this year is just one more item for consumers to worry about. Standing in the parking lot outside a grocery store in Worthington, customer Kirk Davidson said he's really feeling the higher cost of food.

"You'll still have your specials, you can still go get a 70 cents per pound turkey on special for Thanksgiving," Davidson said. "But overall I've seen the increase in prices and it is a concern, it's a concern for everyone."

The cost of food prepared at home is up 7.5 percent over a year ago. That's three times the average increase. The increased costs reflect in part higher grain prices, which spiked because of ethanol production, rising oil prices and speculative buying.

U.S. Agriculture Department economist Ephraim Leibtag though said grain is only one component in the cost of food. He said even though food prices are up, they rose nowhere near as much as the cost of raw ingredients.

"Remember that retail increase of 9 to 10 percent is still only a fraction of the 80 or 90 or 100 percent increase at the commodity level," Leibtag said.

Since last summer, the situation has reversed. Grain prices have fallen sharply, down 50 percent or more from their peaks. Many consumers are wondering why that drop hasn't shown up in the grocery store where prices are still rising. Leibtag said one answer to that question is because it takes a while for lower grain prices to show up in the food aisle.

"That decline takes at least 3 to 6 months on average to work through the system," Leibtag said.

The grain price drop already has contributed to a significant slowing in the rate of food price inflation.

The most recent Consumer Price Index shows that home food prices increased only a tenth of a percent in October, the smallest monthly increase of the year. In at least one category, dairy products, prices actually dropped.

Leibtag said factors other than declining grain prices are also helping to slow food increases. Energy prices have dropped sharply, reducing the cost of processing and transporting food. World demand for some food products is declining, as the global economic downturn reduces consumers' purchasing power. Add all that up, and USDA economist Leibtag said food price inflation should drop to about 4 percent next year.

"The only reason I haven't adjusted it down even more is because of the uncertainty in the commodity markets," Leibtag said. "I just don't know, with prices dropping so quickly is that long-term or is that kind of an overshooting on the way down as we saw overshooting on the way up. However, if they stay this low for six, seven, ten months, then certainly by the middle of next year we would see substantially lower inflation."

Leibtag said grocery store owners are also trying to decide whether the drop in commodity prices will stick. He said the decisions they make on that issue will be an important factor in how quickly they adjust their food prices.

"Because retailers are less inclined to make short-term adjustments downward if they think long-term the trend is upward pricing," Leibtag said.

There is one very visible exception to that general rule, noticeable right now. Turkey prices have increased 5 to 10 percent over the last year. At Thanksgiving though, most grocers cut prices, maybe 10 to 15 cents a pound. It's a move designed to attract shoppers into the store, where it's hoped that they'll buy the more profitable trimmings to go with their lower priced turkey.