Food Prices Outpacing Overall Inflation Rate

A new report from FactSet Insight dated July 15th highlights the dramatic increase in food inflation over the last few months. Although the report suggests that most of the current food inflation is caused by seasonal or cyclical rather than macroeconomic factors, it is still a serious issue to policymakers as higher food prices have a negative impact on consumer confidence via their disproportionate impact on lower income families.

Overall inflation mild, food inflation wild

Headline U.S CPI inflation remains low by historical standards. In May, the total CPI inflation was 2.1% year-over-year, while core inflation (which excludes food and energy) was a tad lower at 2.0%. Inflation appears even less threatening if you look at the Fed’s price index of choice, the PCE price index — total PCE inflation was just 1.8% year-over-year as of May, relative to a mere 1.5% for the core index.

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food prices

That said, it should be noted both inflation measures have picked up pace significantly in the last six months: total CPI inflation was just 1.2% in November 2013 and PCE price inflation was 1.0%. If you start to drill into the component numbers of both indices, it becomes evident the main reason for this acceleration in overall inflation is food prices. The CPI food index increased by a more worrisome 2.5% year-over-year as of May, with major increases in several important agricultural products: beef and veal increased by 10.7%, pork rose by 12.2%, eggs were up by 10.1% and citrus fruit up by 22.5%.

Reasons for higher food prices

The FactSet report highlights that a “confluence of weather- and disease-induced shortages is largely to blame for the surging food prices.” They point to years of record drought in the western U.S. having forced cattle ranchers to cull their herds, dramatically boosting beef and veal prices.

Moreover, the U.S. Department of Agriculture’s (USDA) June 2014 Livestock, Dairy, and Poultry Outlook states that “consumers face record or near-record retail beef prices at the meat counter.” Experts say that even if rain does come, it will likely take several years for herd levels to recover, so consumers are probably looking at high beef prices for at least two or three years.

In coincidentally poor timing, pork supplies are also very tight because of a porcine virus that has led to reduced numbers of hogs being slaughtered. Furthermore, there is strong global demand for U.S.pork as  global dietary trends toward animal protein is fueling the demand. Analyst say the same trend is supporting both domestic and export demand for eggs, which is maintaining prices high even though egg production is at close to record levels.

The citrus fruit supply was also decimated by disease in Florida and bad weather in California. Citrus greening damaged a large portion of Florida’s orange crop this year; and a December 2013 freeze ruined most of California’s fresh citrus crop.