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Wednesday, April 20, 2011

Consumers and Food Price Inflation

Randy Schnepf
Specialist in Agricultural Policy

Joe Richardson
Specialist in Social Policy

The heightened commodity price volatility of 2008 and 2010 and the subsequent acceleration in U.S. food price inflation associated with those market shifts raised concerns and generated many questions about farm and food price movements by Members of Congress and their constituents. This report responds to those concerns by addressing the nature and measurement of retail food price inflation. For a discussion of the relationship between farm and retail prices, and the major factors influencing retail food prices, see CRS Report R40621, Farm-to-Food Price Dynamics.

During the 1991 to 2006 period, U.S. food prices were fairly stable—annual food price inflation, as measured by the U.S. Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) for all food (excluding alcoholic beverages), averaged a relatively low 2.5%. However, several economic factors emerged in late 2005 that began to gradually push market prices higher for both raw agricultural commodities and energy costs, and ultimately retail food prices. U.S. food price inflation increased at a rate of 4% in 2007 and at 5.5% in 2008—the highest since 1990 and well above the general inflation rate of 3.8%.

By late 2008 the inflationary price trends had reversed. Prices for many raw agricultural commodities had already started to decline by late spring of 2008; however, owing to lags in the adjustment process, it was not until November 2008 that monthly food price inflation fell to near 0%, and it actually declined from February through May 2009. Annual food price inflation dropped from 5.5% in 2008 to 1.8% in 2009. Although the price inflation trend reversed itself in mid-2009, average annual food price inflation continued to fall hitting 0.8% in 2010. USDA projects that annual food price inflation will accelerate into a range of 3%-4% in 2011 as surging commodity and energy costs drive inflation higher in the latter half of 2011.

The all-food CPI has two components—food-at-home and food-away-from-home. The food-athome CPI is most representative of retail food prices and is significantly more volatile than the food-away-from-home index. The food-at-home CPI is projected in a range of 3.5% to 4.5% for 2011, compared with a 3% to 4% annual inflation rate for food-away-from home prices. This difference is partially explained by the larger share of farm products in the final price of retail foods than in food-away-from home. Farm product prices are, in general, substantially more volatile than the other marketing and processing costs that enter into retail or ready-to-eat foods.

Many wages and salaries, as well as federal programs (including several domestic food assistance programs), are linked to price inflation through escalation clauses in order to retain their purchasing power. For households where income and federal benefits do not keep up with price inflation, declines in purchasing power are real and immediate. However, even for households with escalation clauses, a time lag usually occurs between the time the price inflation is measured and the time when the wage or program benefit is adjusted upward to compensate.

The 2008-2009 global economic crisis—which encompassed higher retail prices, unemployment, income loss, and lower effective household purchasing power—resulted in higher participation rates in the federal food and nutrition programs. The past decade has seen a tremendous expansion in use of USDA’s food and nutrition assistance programs—federal expenditures totaled $94.8 billion in FY2010 and marked the 10
th consecutive year in which food and nutrition assistance expenditures exceeded the previous historical record. Since FY2004, expenditures for food and nutrition assistance have more than doubled.

Date of Report: April 14, 2011
Number of Pages: 33
Order Number: R440545
Price: $29.95

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