Food Inflation Fears Vs. Facts

Wheat prices spike because of a Russian drought. Beef prices rise as the world demands more protein. Corn prices rise to feed the beef. Milk prices jump seven percent in a year, partly because summer heat makes cows less productive. Eggs disappear from store shelves on salmonella fears.

Just when it looked like that shopping cart full of groceries might cost more than a trip to Hawaii...the USDA says don't worry. It released a reportpredicting food prices for consumers will only rise a half to 1.5 percent this year, the slowest rate of inflation since 1992. Even with the Russian drought impacting wheat, flour prices are down more than five percent from a year ago. (See more commodity prices here.)

Beef prices actually dropped a little in July, though they are up 7 percent from a year ago. Ranchers have thinned their herds, decreasing supply.

"In our view, rising beef prices will have a negligible impact on headline inflation," says a report from BofA/Merrill Lynch. "Meat represents less than 1.7 percent of the overall consumer price index."

But what about reports in today's Wall Street Journal about the big run-up in beef? "This is a short-term situation, and most experts believe the market will pull back at least $2-$3 (per hundredweight) pretty quickly," says rancher Brett Crosby, who also hedges his cattle operation on the futures market. "The feedlots had a rough winter which, combined with poorer quality corn, kept cattle from gaining very well, and resulted in lighter cattle going to slaughter this spring." He says domestic demand for beef has been "fair to poor", but exports have been strong. Still, it may not be enough to convince ranchers to once again expand their herds.

Crosby says production costs have risen 40 percent per head in the last five years. "Ranchers, therefore, have to realize prices around the current price level to even begin to think about expanding their herds," which he doesn't think is sustainable. "From the retail side, this means that prices would have to increase by about $.40/lb in the grocery market."

Meantime, restaurant menu inflation has been growing faster than grocery prices, but not as fast as rising costs.

A report from Morgan Joseph says wholesale prices for finished consumer foods rose 4.4 percent in July, while full-service menu prices rose only 1.2 percent, and "restaurant menu price inflation remains near its lowest levels in the last ten years." I spoke to the operations manager for a chain of bagel stores in Southern California. His costs are rising, but with sales off five percent in a down economy, he's not planning on passing those costs along. Too many people are already wary of spending money on things like bagels and lattes. "I blame Suze Orman," he said.