Food devours less of budget as prices drop again in July

9/10/2009

Grocery shoppers are seeing a further reprieve from last year's steep price increases.

Food prices are dropping on some key items as retailers slash prices to better compete and food makers do more promotions and pass along savings from lower ingredient and gasoline costs.

Prices for dairy, meat, fruits, vegetables, and bread have all fallen.

A U.S. Labor Department price index of food sold to be eaten at home fell for the seventh time in eight months in July. The index, which is part of the Consumer Price Index, fell 0.5 percent in the most recent month and is down 0.9 percent in 12 months.

In fact, overall food prices - what's sold in groceries and restaurants - haven't risen on a monthly basis since November, 2008.

Still, that doesn't make up for the surge in food prices from last year, when costs for ingredients such as wheat and corn and fuel costs for transportation soared to record highs. Food makers raised their prices and some even shrank package sizes to protect their profits. The Consumer Price Index's food-at-home index finished last year up 6.7 percent, so the less than 1 percent drop so far this year doesn't erase that.

But ingredient costs for major food makers, including Heinz, Kraft, and Hormel, are down an average 28 percent as of Sept. 1 from the same time last year, according to Jonathan Feeney, food analyst for Janney Montgomery Scott.

That means the food industry has room to give back some of those price hikes - and feed the frugal consumer who is using more coupons, buying more store brands, and switching to discounters to stretch a budget.

Consumers' demand to save money is pressuring retailers and manufacturers to cut everyday prices and boost promotions throughout their stores.

The factors that drive what consumers actually pay can vary wildly.

Weather, demand, oil prices, and market competition all play roles. And each food category has its own economics of supply and demand.

One recent federal report said food prices are likely to start edging upward again as the economy recovers.

The report, by the Economic Research Service of the Department of Agriculture, forecast that prices for what it calls "food at home," a category that includes purchases at grocery stores, convenience stores, and farmers' markets, will rise 2 percent to 3 percent this year.

"We do expect some price increases with the recovering economy," said Ephraim Leibtag, a senior economist at the Agriculture Department. "Our numbers here imply there has to be some additional inflation in the next six months to get out of the negatives we're in right now."