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:

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 upward for 2011.

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.

For 2012, food price inflation is expected to abate from 2011 levels but is projected to be slightly above the historical average for the past two decades. The all-food CPI is projected to increase 2.5 to 3.5 percent over 2011 levels, with food-at-home prices increasing 3 to 4 percent and food-away-from-home prices increasing 2 to 3 percent. While many inflationary pressures that drove prices up in 2011 are not expected to intensify and may even decrease in 2012, retailers have been slow to pass on cost increases to date. Price levels in 2012 will hinge significantly on several macroeconomic factors such as weather conditions, fuel prices, and the value of the U.S. dollar (an indicator of global demand).

August 2011 Prices (Not Seasonally Adjusted)

The CPI for all food increased 0.5 percent from July to August 2011, 0.4 percent from June to July 2011, and is now 4.6 percent above the August 2010 level. The food-at-home CPI increased 0.6 percent in August 2011 and is up 6.0 percent from last August, while the food-away-from-home index was up 0.4 percent in August 2011 and is 2.7 percent above last August. Food commodity and energy price increases over the past year, combined with a weak U.S. dollar, have caused most of the grocery store price increases observed in 2011. The all-items CPI was up 0.3 percent in August and is 3.8 percent above the August 2010 level.

Beef prices increased 0.4 percent in August and are 10.4 percent above last August, with steak prices up 9.6 percent and ground beef prices up 10.8 percent. Drought conditions in the South, along with rising feed prices and strong international demand, have led ERS to revise its 2011 forecast upward--beef and veal prices are now projected to increase 8.0 to 9.0 percent in 2011. Pork prices increased 0.7 percent in August and are 7.5 percent above last August’s level. Poultry prices decreased 0.1 percent in August and are 3.4 percent above prices last year at this time, with chicken prices up 2.3 percent and other poultry prices (including turkey) up 7.6 percent. Due to higher input costs, beef and pork prices remain significantly higher than in 2010. The beef and pork industries also downsized their inventories during the high price inflation of 2007-08, and the supply of these commodities remains low relative to demand.

Egg prices increased 4.9 percent in August 2011; egg prices remain high and are now 14.5 percent above the August 2010 level. The inventory of table egg-laying hens in the U.S. decreased for five of the first seven months of 2011, leading ERS to revise its price outlook for eggs to 5.0 to 6.0 percent in 2011.

Fish and seafood prices were down 0.4 percent from July to August 2011 and are 8.3 percent above the August 2010 level. Rising feed prices, in conjunction with shocks to the global market resulting from recent Japanese supply disruptions, have led to fish and seafood prices that are considerably higher than 2010 levels.

Dairy prices were up 0.9 percent from July to August 2011, compared with a 1.2-percent increase from June to July 2011. Dairy prices are now 9.1 percent above the August 2010 level. Within the dairy category, prices changed as follows in August: milk prices were up 1.0 percent and are 11.4 percent above last August’s prices; cheese prices were up 0.9 percent and are 8.8 percent above last August’s level; ice cream and related product prices were up 0.3 percent and are 9.0 percent above last August’s level; and butter prices decreased 0.1 percent this month and are 16.8 percent above last August. In 2010, dairy prices were up only 1.1 percent from 2009 (following a 6.4-percent decline from 2008 to 2009). Due to higher projected prices for farm milk in 2011, ERS forecasts that retail dairy prices will increase 5 to 6 percent in 2011.

Fresh fruit prices increased 0.7 percent in August, and the fresh fruit index is up 9.1 percent overall from last year at this time, with apple prices up 7.4 percent, banana prices up 5.8 percent, citrus fruit prices up 7.6 percent, and other fresh fruit prices up 11.9 percent. The fresh vegetable index was unchanged in August. Since last year at this time, fresh vegetable prices are up 6.0 percent, with potato prices up 15.7 percent, lettuce prices up 5.0 percent, tomato prices up 5.0 percent, and other fresh vegetable prices up 3.1 percent from this time last year. Processed fruit and vegetable prices decreased 0.4 percent in August and are 2.4 percent above the August 2010 level. The contracts within the processed fruit and vegetable industry have kept price inflation well below that for fresh fruits and vegetables throughout 2011.

Cereal and bakery product prices were up 0.8 percent from July to August 2011 and are up 5.3 percent from last year at this time, with bread prices up 8.6 percent and breakfast cereal prices up 4.5 percent over the past year. Lower yields for hard red varieties of wheat due to flooding in the Midwest have raised wheat prices to historically high levels. Sugar and sweets prices were up 1.2 percent in August and are 4.7 percent above last August. Prices for nonalcoholic beverages, including coffee and carbonated beverages, increased 0.3 percent in August 2011 and are up 4.0 percent from last year.

The index for fats and oils was up 1.0 percent from July to August 2011 and is 10.8 percent above the August 2010 level. The significant price increase over 2010 is due in large part to surging soybean prices.

Food CPI and Expenditures: What’s Behind the Forecasts?

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

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