USDA Retail Food-Inflation Forecasts for 2010 and 2011 (Text)

Following is the text detailing forecasts for percentage changes in annual food prices, according to the U.S. Department of Agriculture:

Food Price Outlook, 2010

In 2010, the Consumer Price Index (CPI) for all food is projected to increase 0.5 to 1.5 percent--the lowest annual food inflation rate since 1992. Food-at-home (grocery store) prices are also forecast to increase 0.5 to 1.5 percent, while food- away-from-home (restaurant) prices are forecast to increase 1 to 2 percent.

The all-food CPI increased 1.8 percent between 2008 and 2009. Food-at-home prices increased by 0.5 percent--the lowest annual increase since 1967--with dairy prices declining 6.4 percent and fresh produce prices dropping 4.6 percent, while food-away-from- home prices rose 3.5 percent in 2009.

Although inflation has been relatively weak for most of 2009 and 2010, higher food commodity and energy prices are now exerting pressure on wholesale and retail food prices. Hence, food inflation is predicted to accelerate during the final months of 2010 and the first half of 2011, leading to a forecast of 2 to 3 percent food price inflation in 2011.

October 2010 Prices

The CPI for all food increased 0.2 percent from September to October 2010, increased 0.3 percent from August to September 2010, and is now 1.4 percent above the October 2009 level. Over the past 8 months, the food CPI returned to a positive annual growth rate, following 6 consecutive months--September 2009 to February 2010--of annual declines in food prices (a first since 1959). The food-at-home CPI increased 0.2 percent in October 2010 and is up 1.4 percent from last October, while the food- away-from-home index was up 0.1 percent in October 2010 and is also 1.4 percent above last October. The all-items CPI was up 0.1 percent in October and is 1.2 percent above the October 2009 level.

Beef prices increased 1 percent in October and are 7.3 percent above last October, with steak prices up 6.8 percent and ground beef prices up 7.9 percent. Pork prices increased 1.1 percent in October and are 12.8 percent above last October’s level. Poultry prices also increased 1.1 percent in October and are 3.1 percent above prices last year at this time, with chicken prices up 2.7 percent and other poultry prices (including turkey) up 4.3 percent. For most of 2009, retail meat prices were lower than the previous year due to weak demand stemming from the global recession. However, with rising commodity prices and input costs over the past 6 months, beef and pork prices are now significantly higher than in 2009. Increased inflation for beef and pork products is expected in the final months of 2010, as reflected in ERS’s updated 2010 forecasts--beef prices are now projected to increase 2.5 to 3.5 percent and pork prices 5 to 6 percent.

Egg prices dropped 9.6 percent in October (following a 9.2- percent increase in September), so that egg prices are 0.7 percent above the October 2009 level.

Dairy prices increased 1.1 percent in October and are 3 percent above the October 2009 level. Within the dairy category, prices changed as follows in October: milk prices were up 0.8 percent and are 5.8 percent above last October’s prices; cheese prices were up 1.3 percent and are 4 percent above last October’s level; ice cream and related product prices were up 2.6 percent but are 1.3 percent below last October’s level; and butter prices increased 4.4 percent this month and are 25.4 percent above last October. In 2009, dairy prices were down 6.4 percent from 2008 (the largest annual decrease since 1949). However, higher projected prices for farm milk in 2010 will lead to increases of 1.5 to 2.5 percent for dairy products in 2010 and potentially even higher inflation in 2011.

Fresh fruit prices increased a mostly seasonal 1.4 percent in October due to increases in banana and other fresh fruit prices. However, the fresh fruit index is still down 2.3 percent overall from last year at this time, with apple prices up 3.7 percent, banana prices down 4 percent, citrus fruit prices down 0.7 percent, and other fresh fruit prices down 3.8 percent. Fresh fruit prices have fallen in 5 of the past 9 months, leading to an overall fresh fruit forecast of 0 to 1 percent inflation in 2010. The fresh vegetable index increased a completely seasonal 0.7 percent in October due to increases in tomato and other fresh vegetable prices. Since last year at this time, fresh vegetable prices are up 4.4 percent, with potato prices up 1.2 percent, lettuce prices up 0.4 percent, tomato prices up 6.6 percent, and other fresh vegetable prices up 5.6 percent. Processed fruit and vegetable prices decreased 1.1 percent in October and are 1.6 percent below the October 2009 level.

Cereals and bakery product prices were down 0.1 percent from September to October 2010 and are down 0.6 percent from last year at this time, with bread prices down 0.8 percent and breakfast cereal prices down 1.4 percent over the past year. Higher wheat commodity costs should begin to affect cereal and bakery product prices over the next few months, causing prices to rise 1 to 2 percent overall in 2010. Sugar and sweets prices were up 0.2 percent in October and are 3.2 percent above last October. Within the nonalcoholic beverages category, prices changed as follows in October: carbonated drink prices were down 1.7 percent and are down 1.1 percent from October 2009; coffee prices were up 0.8 percent and are up 3 percent from last October; and nonfrozen noncarbonated juices and drinks prices were up 0.8 percent in October but are 1.8 percent below the October 2009 level.

Background on the CPI for Food

Although ERS analyzes changes in retail prices for individual food items, sometimes it is useful to record and analyze a measure of change for the overall level of food prices.

The Consumer Price Index (CPI) is the most publicized and most widely used measure of the general level of prices in the U.S. economy. The CPI is a composite measure of the level of average prices paid by urban consumers for a defined market basket of goods and services, including food.

The CPI for food at home is a component of the full CPI and is the principal indicator of changes in retail food prices. Policymakers, both public and private, closely follow the CPI for food consumed at home and its changes, which measure price inflation for food items. The CPI for food consumed at home also affects policy evaluation because the effects of many current and proposed policies are evaluated based on CPI measures. To contribute to the analysis of government and commercial decisionmakers, ERS estimates the future direction of changes in the CPI for all food, food at home, and food away from home (see data on the CPI for food forecasts).

The food price level can be influenced by changes in costs incurred by food system firms. Changes in input costs can translate directly into changes in the CPI or may have little or no effect. Researchers at ERS not only produce forecasts of the CPI but also analyze the impact of economic factors on changes in the CPI, including changes in firms’ costs.

ERS regularly updates and provides food price forecasts for the short-term period of 12 to 18 months. These forecasts are a composite of formal model results and judgment. Monthly Bureau of Labor Statistics’ indexes for all food, food away from home, food at home, and 15 food at home categories are used in conjunction with ERS analysis to adjust the current short-term forecasts for each of the food categories. See ERS data on the CPI for food and CPI forecasts.

ERS food price forecasts are developed through a three-step process:

* First, USDA develops its 10-year baseline projections. The baseline provides long run projections for the agricultural sector and covers agricultural commodities, agricultural trade, and aggregate indicators of the sector, including farm income and food prices. The baseline projections are a conditional scenario with no shocks and are based on specific assumptions regarding the macroeconomy, agricultural policy, the weather, and international developments. In particular, the baseline incorporates provisions of the Farm Security and Rural Investment Act of 2002 (2002 Farm Act) and assumes that current farm legislation remains in effect through the projections period. For the actual projections, see the USDA Agricultural Baseline Projections Briefing Room.

* In the second step, ERS analysts develop the short-term forecasts that incorporate the most recent baseline assumptions and current information on market conditions and expectations, weather patterns, commodity prices and supplies, and expected consumer demand for specific foods.

* In the third step, these short-term forecasts are compared with a computer-based Autoregressive Integrated Moving Average (ARIMA) model that determines whether the ERS short-term forecast falls within an expected statistical range of a 95- percent confidence interval.

Food price forecasts developed using this three-step process are subject to revision if the conditions on which they are based should change significantly. Projections could be affected by changes, for example, in the feed grain crop outlook; in export markets, especially for meat items; in nonfarm markets; or in weather-related crop conditions in major fresh fruit and vegetable growing areas.

Historical data indicate that fresh fruits and vegetables and egg prices are the most volatile food prices that ERS tracks. Grain price changes affect the price of meats, poultry, eggs, and dairy products more than the prices of other food items and to a lesser extent cereals and bakery products. Because these items account for more than half of the at-home food dollar, price changes for these categories can significantly affect the Consumer Price Index (CPI) for food at home.

SOURCE: U.S. Department of Agriculture

To contact the reporter on this story: Terry Barrett in Washington at tbarrett1@bloomberg.net

To contact the editor responsible for this story: Alex Tanzi at atanzi@bloomberg.net

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