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Monday, October 15, 2012

Consumers and Food Price Inflation

Randy Schnepf
Specialist in Agricultural Policy

Record Midwest heat in June and July (2012) sparked the worst U.S. drought since 1956, causing damage to major field crops. This situation has contributed to record U.S. prices for corn and soybeans in both cash and futures markets in 2012, and has fanned the fears of food price inflation reminiscent of 2008. The heightened commodity price volatility of 2008 and the subsequent acceleration in U.S. food price inflation associated with commodity market shifts raised concerns and generated many questions about farm and food price movements by Members of Congress and their constituents. However, historical evidence suggests that retail prices for processed food products are driven more by consumer demand (strongly linked to general economic conditions), than by price changes in raw commodity markets, although this linkage varies with the degree of raw commodity content in the retail product. 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, by Randy Schnepf. This report focuses instead on the nature and measurement of retail food price inflation and its relationship to consumers.

During the 1991 to 2006 period, U.S. food prices were fairly stable—annual food price inflation, as measured by the 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%. The situation of sharply rising prices came to a sudden halt in late 2008 when the financial crisis hit U.S. markets leading to a severe economic recession. Annual food price inflation dropped to 1.8% in 2009 and 0.8% in 2010, before rising to 3.7% in 2011 driven by improving U.S. and global economic conditions. USDA projects that annual food price inflation will range from 2.5% to 3.5% in 2012 and rise to 3%-4% in 2013.

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% to 4% for 2013, compared with a 2.5% to 3.5% 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 consumer 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 involved higher retail prices and unemployment, income loss, and lower effective household purchasing power—resulted in higher participation rates in the federal food and nutrition programs since then. As a result, USDA’s food and nutrition assistance programs have seen a tremendous expansion in use—federal expenditures totaled $103.3 billion in FY2011 and marked the 11th consecutive year in which food and nutrition assistance expenditures exceeded the previous historical record. Since FY2000, expenditures for food and nutrition assistance have more than tripled.

Date of Report: October 4, 2012
Number of Pages: 36
Order Number: R40545
Price: $29.95

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