The Drought's Impact on Food Prices
Despite the warnings that last summer's historic drought would drive up the cost of food, prices rose only 2.6 percent in 2012, down from 3.7 percent growth in 2011, according to the USDA.
Inflation slowed nearly 50 percent for food bought at grocery stores, while it jumped for food bought at restaurants. Prices in 2012 rose significantly for beef, poultry, fats and oils, but pork prices stayed basically flat and prices for fresh vegetables dropped. (Read More: Drought Still Plagues US: Food Prices 'Going Up'.)
Many of these trends are expected to reverse in 2013.
This year the USDA expects overall food inflation to rise between 3 and 4 percent, "above the historical average." It expects prices to rise especially during the first half of the year, as livestock producers have depleted their herds due to the high cost of feed last fall. This initially created a glut for meats like pork, where prices in December were more than three percent lower than the year before.
As for beef, "Cattle liquidation due to the drought led to falling beef prices in recent months," the USDA report said. "However, this factor was smaller than anticipated." That is one reason why December beef prices were 4.6 percent higher year over year, with ground beef prices up 5.6 percent.
There have reports of record high prices for chicken wings heading into Super Bowl Sunday, and the USDA says poultry prices continued rising in December. (Read More: Super Bowl Wings Will Be Spicy and Pricey This Year.)
Egg prices are also rising. However, "fluid milk" prices "have followed a downward trajectory for most of 2012, as production increased and exports fell." But milk is starting to get more expensive again, "as the impact of the drought is incorporated into the production supply chain."
Some of the biggest jumps in 2012 were in fresh produce. Apple prices were up over 13 percent, for example, but for 2013, fresh fruit inflation will fall back to tracking that of all food inflation. On the other hand, fresh vegetables, which cost less in 2012, will cost a lot more in 2013. Already restaurants are complaining that prices for lettuce, broccoli, and other greens are two to three times higher than they were a year ago due to the recent California freeze. (Read More: Rising Food Costs Are Manageable: Wendy's CEO.)
Where are the best bargains? Fish and seafood, where prices fell slightly in December and where 2013 inflation is expected to be less than the overall food category.
Also, eat out more. Restaurants are not expected to raise their prices as much as grocery stores. That's good news for consumers, bad news for restaurant margins.
—By CNBC's Jane Wells; Follow her on Twitter: @janewells