USDA Retail Food-Inflation Forecasts for 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, 2011

In 2011, the Consumer Price Index (CPI) for all food is projected to increase 3 to 4 percent. Food-at-home (grocery store) prices are forecast to rise 3.5 to 4.5 percent, while food-away-from-home (restaurant) prices are forecast to increase 3 to 4 percent. Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections for 2011 upward.

The all-food CPI increased 0.8 percent between 2009 and 2010, the lowest food inflation rate since 1962. Food-at-home prices increased by 0.3 percent--the lowest annual increase since 1967- -with cereal and bakery product prices declining 0.8 percent and processed fruit and vegetable prices dropping 1.3 percent. Food- away-from-home prices rose 1.3 percent in 2010, the lowest annual increase for restaurant prices since 1955.

March 2011 Prices (Not Seasonally Adjusted)

The CPI for all food increased 0.7 percent from February to March 2011, increased 0.4 percent from January to February 2011, and is now 2.9 percent above the March 2010 level. The food-at- home CPI increased 1 percent in March 2011 and is up 3.6 percent from last March, while the food-away-from-home index was up 0.3 percent in March 2011 and is 1.9 percent above last March. Food commodity and energy price increases over the past 9 months have caused recent increases in grocery store prices, resulting in ERS raising its food-at-home inflation forecast to 3.5 to 4.5 percent for 2011. The all-items CPI was up 1 percent in March, mostly due to higher food and energy prices, and is 2.7 percent above the March 2010 level.

Beef prices increased 2.3 percent in March and are 12.2 percent above last March, with steak prices up 11 percent and ground beef prices up 13.6 percent. Pork prices increased 2.3 percent in March and are 11.2 percent above last March’s level. Poultry prices were unchanged in March and are 2.2 percent above prices last year at this time, with chicken prices up 1.6 percent and other poultry prices (including turkey) up 4.7 percent. As commodity prices and input costs have risen over the past 9 months, beef and pork prices are now significantly higher than in 2010. Increased inflation for beef and pork products is expected for most of 2011, as reflected in ERS’s forecasts--beef prices are now projected to increase 7 to 8 percent and pork prices 6.5 to 7.5 percent in 2011.

Egg prices decreased 0.2 percent in March 2011 (the third consecutive monthly decline), so egg prices are now just 1 percent above the March 2010 level.

Dairy prices were up 1.3 percent in March and are 3.7 percent above the March 2010 level. Within the dairy category, prices changed as follows in March: milk prices were up 3.4 percent and are 6.8 percent above last March’s prices; cheese prices were up 1 percent and are 1.9 percent above last March’s level; ice cream and related product prices were down 1.5 percent but are 4.2 percent above last March’s level; and butter prices increased 1.7 percent this month and are 31.9 percent above last March. In 2010, dairy prices were up only 1.1 percent from 2009 (following a 6.4-percent decline from 2008 to 2009). However, higher projected prices for farm milk in 2011 will lead to increases of 4.5 to 5.5 percent for retail dairy product prices in 2011 based on current ERS forecasts.

Fresh fruit prices decreased a mostly seasonal 1.3 percent in March. The fresh fruit index is down 1.5 percent overall from last year at this time, with apple prices up 2.3 percent, banana prices up 6.3 percent, citrus fruit prices up 8.5 percent, and other fresh fruit prices down 8.2 percent. Fresh fruit prices fell in 7 of the past 14 months, leading to an overall fresh fruit price decline of 0.6 percent in 2010. However, current forecasts predict some price inflation for fruit prices in 2011. The fresh vegetable index increased 4.2 percent in March. Since last year at this time, fresh vegetable prices are up 9.8 percent, with potato prices up 12.1 percent, lettuce prices up 27.3 percent, tomato prices up 10.6 percent, and other fresh vegetable prices up 5 percent. Processed fruit and vegetable prices increased 0.3 percent in March (the seventh monthly increase in the past 14 months) and are 1.2 percent above the March 2010 level.

Cereal and bakery product prices were up 0.5 percent from February to March 2011 and are up 1.8 percent from last year at this time, with bread prices up 2.7 percent and breakfast cereal prices up 2.1 percent over the past year. Although cereal and bakery product prices declined 0.8 percent overall in 2010, higher wheat commodity costs should begin to affect cereal and bakery product prices over the next few months, causing prices to rise 3.5 to 4.5 percent overall in 2011. Sugar and sweets prices were up 0.7 percent in March and are 2.8 percent above last March. Within the nonalcoholic beverages category, prices changed as follows in March: carbonated drink prices were up 1.1 percent and are up 1 percent from March 2010; coffee prices were up 3.9 percent and are up 9.4 percent from last March; and nonfrozen noncarbonated juices and drinks prices were down 0.1 percent in March and are unchanged from the March 2010 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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