1992 food price update - Consumer Price Index expected to rise by 2-4% in 1992, affected by slow recovery from recession and increased supplies of several foods - U.S. Dept. of Agriculture, Economic Research Service Report

Agricultural Outlook, April, 1992

1992 Food Price Update

The Consumer Price Index (CPI) for food will increase moderately in 1992--in the range of 2 to 4 percent. Prices for some foods this year will actually decline from 1991 levels, while others are expected to rise only slightly. Slow recovery from the recession along with increased supplies of several foods will be the major factors influencing food price changes in 1992.

The economy is slowly emerging from the recession, with no appreciable growth expected until the second half of 1992. In the meantime, inflation and personal income growth will remain low. Both inflation and changes in demand influence food prices at the retail level. Inflation raises the cost of processing and distributing food, while stagnating or declining personal income dampens consumer demand.

Cost for processing and distributing food, such as labor, packaging, transportation, and energy, account for about 73 percent of consumers' food dollar. The farmer's share is 27 percent. Since processing and distribution costs occur beyond the farm gate, changes in the general economy, particularly inflation, can affect these costs significantly. A sluggish economy, for example, holds down overall inflation, including retail food prices.

The monthly change in the January 1992 food CPI was only 0.4 percent, the lowest January increase since 1976. The January rise in the food CPI is normally 1 percent or more--sharper than other 1-month changes because it generally reflects first-of-the-year upward price adjustments by food processors to cover their increased input costs. The unusually small change this year indicates that the recession has dampened those increases.

Real disposable personal income is expected to increase 1 percent in 1992, mostly in the last half of the year, after declining 1 percent last year. Despite the slight increase projected, real disposable income will remain below prerecession levels. As a result, consumer budgets will remain tight and consumer demand for higher value foods in particular is not expected to grow much, so price increases will remain limited.

Increased supplies of beef, pork, and poultry this year will cause retail meat prices to decline. Beef production will gain only 2 percent, but pork production is expected to be up 7 percent, and poultry production up 4 percent. With the added production, per capita consumption of red meat and poultry is expected to reach a record 221 pounds in 1992.

The long-awaited expansion in meat production comes at a time when consumers' budgets are constrained by slow income growth, so meat prices will likely decline to clear the market. The CPI for meat is expected to decline 3-5 percent from the 1991 average, and poultry 2-4 percent. These price declines will have a significant dampening effect on the CPI for all food.

For most remaining food categories, the CPI will show modest increases of 1-3 percent. These price advances will come primarily from rising processing and distribution costs.

The most recent outlook for U.S. wheat, for example, calls for sharply reduced supplies, higher exports, and tight stocks.

Tight wheat supplies, decreased winter wheat acreage, and prospects of larger wheat exports in 1992 have caused farm prices of wheat to rise sharply in recent months--59 percent from July 1991 to February 1992. Higher wheat prices as well as slightly higher processing and distribution costs will cause the index for cereals and bakery products to rise more than other categories--by 4-6 percent.

But how will U.S. consumers be affected? If farm wheat prices double, for example, how much would the price of a loaf of bread change?

                         Price Components-
                            A Loaf of Bread
                                  Before      After
Wheat                              $.05       $.10
Other farm
  ingredients                       .02        .02
Processing and
  distribution                      .93        .93
Total price                       $1.00      $1.05

Although the farm share of the consumer's food dollar is about 27 percent, farmers' share of the retail cost of cereal and bakery products is much lower, generally less than 10 percent. Processing and distribution costs account for most of the retail cost of these highly processed products.

The cost of wheat in a loaf of bread in 1990 was 5 percent of the retail price, while other farm ingredients added another 2 percent. The remaining 93 percent came from processing and distribution costs. So, for example, to adjust for a 100-percent increase in the price of wheat, the retail price of a $1 loaf of bread would have to increase by only 5 percent.