Slight decline in food prices is bright spot

March 27, 2009|By Mike Hughlett | Mike Hughlett,Tribune Newspapers

While prices might still seem painfully high in the supermarket aisles, long-suffering consumers are beginning to see a break in their grocery bills - a bit of good news amid the economic gloom.

Falling raw-material costs coupled with a feeble economy have curbed soaring food inflation in recent months. Food prices fell on a month-to-month basis in February for the first time since April 2006.

Last year, food and beverage prices as calculated by the Bureau of Labor Statistics rose 5.4 percent, the largest annual jump since 1990, because of a big run-up in commodity and energy costs.

But as the global economy tanked in late 2008, prices for oil, corn, wheat and soybeans fell. Those declines, after a predictable lag, are filtering down to grocery shelves, said Ephraim Leibtag, a Department of Agriculture economist.

Last month, the consumer price index's food-and-beverages component fell 0.1 percent from January, and Leibtag said he expects further month-to-month declines.

"The decline we saw last month is what we have been expecting, given the decline [in] the global economy and the decline of commodity prices," he said.

Leibtag hasn't changed his food inflation forecast of 3 percent to 4 percent for 2009. Still, given the depth of the recession, he said the increase should be closer to 3 percent, not 4 percent, as he thought at the start of the year.

Foodmakers have been reluctant to pass on price decreases, and commodity prices remain high by historical standards.

Historically, U.S. food prices have risen 2 percent to 3 percent annually.

Bill Lapp, an economist at Advanced Economic Solutions, is less optimistic, forecasting a 5 percent increase in food prices this year. He said livestock producers, still smarting from last year's surge in feed costs, will cut back herds, thus driving up meat prices and pushing up overall food inflation.

Here's a look at what's happening with prices for a couple of food staples:

The bottom has dropped out of the milk market, and that has led to big decreases in retail milk prices in recent months after a painful run-up for much of 2008.

Retail milk prices sank 5.7 percent in February compared with January, according to federal data, the largest month-to-month decrease in 10 years. Milk cost 10 percent less in February than it did a year earlier.

Since 2005, U.S. farmers have added 418,000 cows to meet rising global demand for dairy products, said a recent report by Michael Swanson, an economist at Wells Fargo. But the global recession has slashed demand, with the USDA expecting a 42 percent drop in exports this year.

"Exports have just evaporated on us," Swanson said in an interview. "It's just cratered [milk] prices."

While that's good for consumers, it's bad for dairy farmers, who are facing prices below the cost of production.

Egg prices shot up so much in 2007 and 2008 that federal antitrust regulators took notice. But recently, eggs prices have beat a retreat, falling on a month-to-month basis in four of the past five months.

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