Mary Modarelli feels as though she's taken a pay cut. The New Jersey postmaster earns roughly the same salary that she did last year, but her dollars don't stretch as far -- particularly at the supermarket.
"I'm working more, seeing less," said Modarelli as she exited a grocery store on a recent afternoon. "Food prices are out of control. Every day they seem to go up."
Food inflation is anything but imagined. Prices have jumped 6% over the past year, according to the Bureau of Labor Statistics' Consumer Price Index. That's the highest 12-month increase since 1990, when the U.S. was caught in a worldwide recession disturbingly reminiscent of the current crisis.
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"Wages are not increasing at the same rate as inflation," said Sanjeev Katz, an economist with the bureau. "I would be surprised if anyone got a 6% cost-of-living adjustment."
The price spike couldn't come at a worse time for consumers. Stagnant wages aren't the only problem. Consumers are also feeling pressure from falling home values and tighter credit.
Food prices are 'sticky'
Random interviews with shoppers suggest the pain is motivating some to take action.
Shoppers interviewed for this article outside three supermarkets said they have begun cutting coupons and comparison shopping for the first time.
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Some have even changed their eating habits.
"I'm definitely cutting back," said Irene Arce, a resident of West New York, a New Jersey town just across the Hudson River from New York City. Arce said she now shops at three groceries to find the best deals. "I'm eating more vegetables, less chicken, buying bigger packages and freezing them, and not buying organic anymore."
Those adjustments will help but won't entirely avert the damage. Price increases are just too widespread. Even discount grocers such as ALDI supermarkets -- which hold down prices by forgoing more-expensive name brands -- have raised prices during the past year.
"There's nothing you can do," said Nick Butrico, a manager for the budget-conscious Pathmark grocery chain in Edgewater, N.J. "I see all the changes, some almost every other day, but you've got to eat."
As a result, even the most frugal consumers are trimming household budgets elsewhere. They are eliminating new clothes, entertainment expenses or meals out.
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Many consumers understand that the price of food is tied to prices of energy and fertilizers, and that those prices are linked to the price of oil. What consumers may not fully grasp is that the increase in the price of oil through spring and summer makes its way through to consumers in different ways, depending on the industry. This is why food prices are "sticky," or slow to drop.
Food industry insiders explain that the industry is still factoring in the increased costs incurred for fuel and fertilizer from the summer, and may need to keep boosting prices, even though the price of fuel is falling on fears of a global recession.
"Food prices do tend to move very slowly relative to the underlying costs," said Tom Jackson, an agricultural economist with financial consulting firm IHS Global Insight. "People get upset when prices go up, and they don't really appreciate it when prices go down, so in response, food producers input their costs very slowly."
Apart from that lag in passing on costs, many food producers also are affected by complex contractual agreements designed to even out their costs. As the price of oil ran up, many food producers purchased contracts enabling them to buy oil at a set price in the future. Had oil continued to rise, such contracts would have helped producers keep costs down. Since oil has declined, the contracts constitute an added cost burden.
The influence of forward contracts for fuel delivery, or futures, has muddied the picture on food prices in several ways. On the positive side, the futures contracts give producers a solid basis for long-term planning. On the negative side, futures markets have attracted speculators in commodities. Analysts have suggested that speculation in corn futures in spring and summer -- all related to the price of oil and enthusiasm for corn-based ethanol as a replacement -- helped increase prices for corn by as much as 25%.
Speculative fever can cut both ways. In recent months, the decline in oil prices, as well as a political backlash against corn-based biofuels, has caused demand for ethanol to wane and has undercut the futures markets. As speculators head for the exit, prices for corn and soybeans, both used as biofuels, have fallen about 50%, to their lowest levels in 12 months.
Food prices don't reflect those declines yet.
The prices feel upward pressure from other forces that are likely to remain steady. For one, global demand for food is increasing. Demand for meat has risen in countries with fast-growing middle classes that can finally afford it.
"China, India and other fast growing economic countries are simply demanding more food," said Katz, of the Bureau of Labor Statistics. Advances in farm technology enabling more efficient production have met some of this new demand. But not all of it.
Consumers can expect the global recession -- bringing lower prices for fuel, fertilizer and grain -- to eventually hit store shelves with lower prices. But supermarket shoppers shouldn't bank on seeing that adjustment anytime soon.
Food producers, afraid of future oil spikes, are unlikely to reduce prices until they can be fairly certain that fuel prices are relatively stable. They will likely wait to see impact of recent and promised fuel production cuts by the Organization of Petroleum Exporting Countries. Some producers will want to gauge consumer reaction to the higher prices now in effect before they cut.
"Food producers are going to be afraid of marking things down too much because they are afraid of what is going to happen," said Jackson, the agricultural economist. "Though commodity prices have been coming down, they're still fairly high."
Published Nov. 10, 2008
High