Food Price Deflation Coming To An End?

Retail food prices increased a sharp 1% in January, marking the largest increase in 18 months, according the Food Institute which analyzed the Consumer Price Index released last week by the U.S. government.

Retail food prices increased a sharp 1% in January, marking the largest increase in 18 months, according the Food Institute which analyzed the Consumer Price Index released last week by the U.S. government. This was more than double the four tenths of a percent increase in the CPI for all products.  As a result, The Food Institute foresees that and end to DEFLATION in food prices is likely coming to an end. Last year, food prices were in a deflationary period, meaning prices were under year earlier levels, during the entire second half of the year. This resulted in the smallest increase in retail food prices at the retail level since 1967. But of course, prices cannot continuously decline.

The January retail price increase was the result of higher prices for fresh produce due to freezes in several growing areas, as well as increases in retail coffee, soda, and seafood prices. But look for increases in several other categories noted The Food Institute which also closely monitors another government report, the Producer Price Index, which tracks wholesale prices. This report indicates that meat prices are poised to increase at retail in future months. All of the main protein items -- beef, pork and chicken -- saw wholesale prices rise last month and those increases are often passed on at the retail level shortly thereafter. Indeed in 2009, wholesale food price deflation preceded deflation at retail and was not at all unexpected. The Producer Price Index for finished consumer foods that reflects wholesale food prices was under prior year levels nine of 12 months of 2009 and the index was actually 1.6% under the 2008 level on an annualized basis – the largest such decline since 1967 as well.

More recently however, wholesale prices have been bouncing back, and not only last month, but in December of 2009, prices advanced more than 1% over prior year levels, confirming that price deflation at the wholesale level is likely coming to an end. And, as the accompanying graph shows, retail prices more often than not follow the same trend as wholesale and that will likely be the case again this year.

That is not to say that there won’t be some lower prices on food products this year compared to last, but overall higher prices are on the horizon. Based on the latest data, center of the plate items such as beef, pork and poultry, are leading the pack, along with dairy products. Fresh produce prices, which increased sharply in January due to the weather, are of course more vulnerable to Mother Nature’s forces, than some other categories, so it is difficult to predict with any certainty how those items will fare during the year.

It should be remembered that these increases are coming off a deflationary period last year, so there will certainly be some fluctuations and The Food Institute will be following them each week in the Food Institute report and on its website atwww.foodinstitute.com.