ERS Food Inflation Forecast Unchanged at 2.5% to 3.5% for 2012

July 25, 2012 03:32 AM

Retail food prices, on average, were flat for the first half of 2012. The food-at-home Consumer Price Index (CPI) decreased 0.1% from January to June 2012, with deflationary pressure due to unusually low fruit and vegetable prices as well as decreased prices for fluid milk and pork. Alternatively, prices for beef and veal, poultry, and fats and oils have increased thus far in 2012.

The severe drought in the Midwest is expected to affect prices for corn and soybeans as well as other field crops which should, in turn, impact retail food prices. However, the transmission of commodity price changes into retail prices typically takes several months to occur, and most of the impact of the drought is expected to be realized in 2013. Consumers can expect to say any effect on retail prices the the fall of 2012.

Based on these conditions, USDA's Economic Research Service's (ERS) inflation forecast for both all food and food-at-home (grocery store) prices in 2012 remains unchanged at 2.5% to 3.5%. Looking ahead to 2013, inflation is expected to remain strong for most animal-based food products due to higher feed prices. Furthermore, inflation should be above the historical average for food categories such as cereals and bakery products as well as other foods.

The full extent of the drought and its effects on commodity prices are as yet unknown. All ERS food price forecasts for 2012 and 2013 will be updated monthly, and new information on the scope of the drought will be incorporated into the estimates as it becomes available. Below is a tentative breakdown of the possible affects to retail prices.

  • Beef, pork, poultry, and dairy (fluid milk): Potential increases in retail prices would appear within two months in 2012 and into 2013. In the short term, drought conditions may lead to herd culling in response to higher feed costs and short term increases in the meat supply, decreasing prices for some meat products. That trend would reverse in time after product supplies shrink.
  • Packaged and processed foods (cereal, corn flour, etc.): The full effect of the increase in corn prices for packaged and processed foods will likely take 10 to 12 months to move through to retail food prices.
  • Retail prices: Historically, if the farm price of corn increases 50%, then retail food prices (measured by the Consumer Price Index, CPI) will increase by 0.5% to 1%. More generally, as an overall commodity price index increases, about 14 to 15 percent of that increase is passed on to retail prices for products that use that commodity as an ingredient.

Click here for the category-by-category breakdown.

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