Consumer Food Inflation Remains Absent, Although Wholesale Food Prices and Underlying Commodity Markets Begin To Move Higher

Consumer food inflation (CPI-Food) has remained near zero over the past five months (compared to a year ago). However, wholesale food prices, as measured by the Producer Price Index (PPI), have begun to accelerate, rising by 1.5% from a year ago during January.

The price of a majority of underlying food commodities has been on the rise in recent months, with the AES index of 19 commodity prices up 15% from six months ago (as of mid-February). The higher price of commodities has traditionally been a lead indicator for trends in wholesale costs and ultimately consumer food inflation – suggesting a return to higher rates of food inflation over the course of 2010.

The government’s PPI food report on wholesale prices was released around the middle February, and reports on the change in a broad range of prices. For January, the index of wholesale food costs rose 1.5% from a year ago.

January’s PPI report showed wide variations in price changes (vs. YA). Most notable were fresh fruit prices, impacted by adverse weather in Florida, rising 44% above a year ago levels and up 20% during the past month. Wholesale pork prices rose by 12% from a year ago (+5% over the past month), consistent with higher commodity pork prices. Similarly, rising raw sugar prices led to a 15% in the wholesale price of sugar (vs. YA). Wholesale dairy prices remain 5% above a year ago, although they have eased in recent weeks. It is notable that beef prices rose month over month, but remain 3% below a year ago. While domestic protein and dairy demand remains soft due to high unemployment rates, reductions in supply and larger exports are expected to create a tighter supply and rising price environment during 2010.

The Commodity Price Trends table below provides commodity price information as of February 15, 2010, along with historic comparisons. This gives an indication of commodity price trends, both short-term and longer-term. The AES index, listed at the top, represents an average of the items listed below, index to 20000.

The AES Food Input Cost Index is now 15% above a year. Until recently, the lion’s share of the gain has come from increases in the price of soft commodities, led by a 53% year-over-year gain in the price of sugar. Pork prices have been rising sharply, including a 41% gain in pork belly prices over the past six months.

Commodity prices rose steadily over most of calendar 2009. However since mid-November the AES Food Input Cost Index has been steady. The uptrend in prices stalled as the US dollar began to gain strength. The individual supply/demand factors for each commodity remains important as price drivers, but the changes in the value of the US dollar and crude oil prices will continue to play an important (if not dominant role) in price direction over the next year.

The government reported consumer food prices (CPI-Food) declined by 0.4% during January (vs. YA), following a 0.5% decline last month. This includes a 2.0% decline in the price of food at home and a 1.6% gain in away-from-home food prices. Declines in commodity prices, as well as high unemployment rates, have helped lead to the benign increases in food prices.

The downward pressure on food inflation rates from lower commodity prices has passed, and rising rates of food inflation should be anticipated as we move through 2010. Consumer food inflation is expected to reach 4-5% (year over year) by January 2010. Gains in wholesale food prices (PPI-Food) have already begun to show up, with more likely in the coming months. The primary driver of higher prices will be the underlying commodity prices, but the higher costs for packaging, freight and energy costs should also be anticipated.

Bill Lapp
Advanced Economic Solutions, LLC