Signup for our free newsletter:

Inflation isn't here yet?

Written By Brian Hicks

Posted December 1, 2010

From our new site, Wealth Wire:

Just as we said here, inflation is here… and it’s likely to stick around for a while.

And, according to USA Today:

“Have a big, juicy ham on the Christmas menu? Need some butter to bake those holiday cookies? Hope you’re willing to pay a little — and in some cases a lot — more.

Just as the holiday season hits, food prices are rising — especially on those items you’ll need to cook for all those gatherings and the staples you always keep stocked in the kitchen.

Think meats, milk, eggs, cheese and sugar.

Overall, food prices are increasing, and economists say they will keep climbing next year.

The increase is nothing astronomical when you look at food prices as a whole. The U.S. Department of Agriculture is predicting that food prices this year will rise 0.5% to 1.5%, the lowest annual rate of inflation since 1992. Next year, the forecast is for an increase of 2% to 3%.

“That’s a reasonable amount of increase, especially considering prices last year were a bargain,” said Jerry Conover, director of the Indiana Business Research Center at Indiana University’s Kelley School of Business.

But it’s not as reasonable when you look at some individual items or categories, such as meats and dairy, where the jump is significant. Pork, for example, is up 13% from a year ago; butter is up 25%; and milk has risen 6%, according to the USDA.

To consumers, many of whom are still struggling financially, the increase can seem unbearable.

Prices may seem bad right now because food prices were so abnormally low last year, experts say.

“The market crash in September 2008 knocked prices down because of the uncertainty,” said Mike Hicks, director of the Center of Business and Economic Research at Ball State University in Muncie, Indiana.

The price increase also may feel unreasonable because it hasn’t happened evenly. Some foods have suddenly become more expensive, while others have stayed the same or gotten cheaper.

Several factors are at work, economists say, when it comes to today’s food prices.

First, as the world’s economy has started to recover in recent months, the demand for grains such as corn, wheat and soybeans has risen. Farmers are now exporting more grain internationally, while at the same time, demand in the United States has climbed, too.

Second, because there’s more demand for grain, farmers who raise livestock — both for meat and dairy — are being forced to pay more to feed their herds.

And third, fuel prices are up, making it more expensive to deliver products.

Those higher costs are showing up in wholesale prices for food and, in some cases, retail prices that consumers see at grocery stores and restaurants. General Mills, Sara Lee, Starbucks, J.M. Smucker and Kraft Foods have all raised prices this year.

In response to the situation, farmers have started planting more acres of corn, soybeans and other grain to meet the growing demand. However, that additional supply will take a while to ripple through the industry, and research from Purdue University predicts that a spike in the cost of fertilizer and pesticides will mean higher production costs for those farmers.

Meanwhile, livestock farmers are responding to the increasing cost of feed by reducing the size of their herds. And that has led to tighter meat supplies.

Food inflation will accelerate during the final month of 2010, the USDA predicts, and the first half of 2011.”