Consumers and Food Price Inflation
Released: 2015-05-11T00:00:00

Introduction

Everyone eats. As a result, everyone is affected to some degree by food price changes. This makes understanding food price changes and their effects on consumers an important matter for Congress. This report provides information on the current status and outlook for U.S. food prices, measuring their changes and how such changes relate to U.S. consumers.

The first section of the report, " Consumer Demand ," briefly reviews the major economic concepts underlying consumer food behavior. The second section, " The Consumer Price Index (CPI) ," describes how U.S. food price inflation rates have evolved since 1915, when federal price data collection for inflation-measuring purposes began. The third section, " Consumer Income and Expenditures ," provides information on recent history and projections for U.S. food expenditure shares relative to total household budget, with comparisons across income quintiles, as well as internationally. The fourth section, " Recent Food Price Inflation ," examines retail food price inflation, including a review and discussion of the level of food price inflation registered by the consumer price index for all-food, at-home-food, and away-from-home-food purchases as well as for major food groups. Finally, a fifth section, entitled " Effect of Retail Price Changes ," briefly discusses the impact that rapid food price inflation can have on government food programs and the more vulnerable consumer groups.

Each section may be read independently of the others. Thus, those readers that are concerned primarily with the current status of U.S. retail food price inflation may proceed directly to the sections entitled " Historic Price Inflation Patterns ," " Recent Food Price Inflation ," or " Effect of Retail Price Changes ."

Consumer Demand

Consumer demand is influenced by economic factors—own-price, the price of close substitutes, the price of complementary items, and household income—as well as by several non-economic factors including tastes and preferences, family size, age of family members, geographic location, shopping behavior, and lifestyle choices. Economists attempt to study and measure the nature of consumer behavior in response to changes in prices, incomes, and household characteristics, with an eye for understanding the potential social welfare outcomes that may result from price and income changes across different socioeconomic groups. Policymakers, in turn, often attempt to use that information to design and implement policies that mitigate the more deleterious effects of price and income changes on consumers.

Price Responsiveness

In general, consumers will use less of any good if its price increases relative to other goods (referred to as the pure "substitution effect" by economists). However, a consumer's price responsiveness is a matter of degree and is subject to the potential influence of disposable income as well as other non-price factors such as those listed in the preceding paragraph.

Under most circumstances, the availability of many close substitutes is likely to make consumers more sensitive or responsive to price changes, because they have the opportunity to switch to similar alternatives. In contrast, a lack of substitutes may give the consumer little choice but to continue to purchase the available good, even as its price rises, especially if it is deemed a necessity. Strong ethnic or cultural tastes and preferences may endear a person to a particular food type such that he or she will continue to purchase that food as its price rises even in the presence of abundant substitutes (for example, ethnic groups that are accustomed to eating rice at every meal may be reluctant to switch to bread or potatoes even if the price of rice rises relative to those other foods).

Rapid or unexpected changes in retail food prices will impact some consumers more than others depending on income levels and the importance of the affected food items in consumers' budgets. In general, if an item represents a very small portion of the consumer's budget (for example, consider salt), then a consumer is less likely to respond to a price change. For the average American consumer, basic food staples such as bread, potatoes, pasta, and rice tend to take smaller shares of the food budget (relative to meat, dairy products, fruits and vegetables, and more processed food products), and, as a result, consumers are less responsive to a change in their price. In contrast, high-valued food items such as expensive cuts of meat or seafood probably represent more costly (and infrequently purchased) delicacies for most households. As a result, most households will tend to be far more responsive to changes in the prices of such high-valued products than for basic staples. Often a price change for an item within a specific food group may result in consumers switching to lower-quality items within that food category—the classic example being a switch from steak to hamburger when meat prices rise. In contrast, a widespread price rise across all food groups may engender substantial reshuffling of consumer food budget allocations as households try to meet their nutritional goals with their limited budgets.

Of course, the absolute size of a consumer's disposable income is also important in determining actual purchasing power. For households with smaller incomes, the food budget itself is likely a larger portion of total household expenditures, and such households are likely to be more responsive to price changes across all food categories than are higher-income households.

In summary, lower-income consumers who spend a significant share of their household budget on food are likely to be impacted more severely by rising food prices (and are likely to be more responsive to price changes) than high-income consumers with lower food budget shares.

Income Responsiveness

A household's absolute level of disposable income (and, to a lesser degree, wealth) directly affects its ability to respond to price changes. As a result, as household incomes grow, consumers often opt for more expensive or higher-quality selections of foods than are presently in their food budget, or may experiment by trying new or unfamiliar foods. For example, as incomes increase in less-developed countries, it is common to see per-capita expenditures on meat and dairy products increase. In contrast, when incomes decline, consumers tend to pull back from more expensive options. If the income decline is severe and is perceived as permanent or long-lasting, consumers may make substantial changes to their food budget choices.

In the aggregate, household consumption behavior in response to perceived income changes (if persistent and widespread) may affect a country's agricultural production or trade patterns, or it may impact the health and nutritional status of certain segments of the population. As a result, it is important for policymakers to monitor household wealth and income levels and distribution for unexpected shifts that may have important economic or health consequences.

Economists call the relationship between changes in consumer income and the quantity of an item purchased an Engel curve . This relationship is used by economists to classify goods.

For a normal good , consumers buy more of it as incomes increase, but at a decreasing rate such that its average budget share declines at higher income levels. For a luxury good , consumers buy more of it as their incomes increase and at an increasing rate such that its budget share increases at higher income levels. For an inferior good , consumers buy less of it as their incomes increase.

Tastes and Preferences

Non-economic factors such as cultural or ethnic preferences may determine both the share of a particular food product in the household's budget (e.g., rice represents a larger share of per-capita expenditure in most Asian households than in most European households at similar income levels) as well as a household's responsiveness to a change in the price of a particular product.

Demographics

Dietary needs also change with age and gender. For example, young children and adolescents generally need both more calories and a higher portion of protein-based calories to meet nutritional demands of rapid physical growth and high activity levels. Populations or households with a large share of individuals from this demographic stratum are more likely to consume larger per-capita portions of meat and dairy products than an older, more mature and sedentary population would. As a result, population demographics such as household composition, size, and age structure often play an important role in consumer price sensitivity and income responsiveness.

Other Non-Economic Factors

Shopping behavior—for example, impulse purchases, quick-stop shopping at convenience stores to and from work, or weekend shopping at big-box discount stores—can influence the food choices as well as the average per-item prices paid by a household. Also, a household's geographic location—for example, inner city, suburbs, or rural areas—may restrict both a consumer's selection of goods and the price range paid for them. Finally, in increasingly affluent societies, lifestyle choices—for example, frequency of dining out, meal choices, etc.—when complemented with sufficient purchasing power, can also play an influential role in household food purchases.

Summary

For households with low disposable income levels where food expenditures are a large share of the budget, rising food prices result in greater responsiveness and may force more difficult budgetary tradeoffs than in higher-income households with smaller food-budget shares. Of course the opposite effect is true during periods of falling prices. However, each household's price and income effects also are influenced by its particular set of non-economic characteristics.

The Consumer Price Index (CPI)

The CPI is perhaps the most widely reported measure of U.S. price inflation. The CPI is used both as an economic indicator of retail price inflation and as a means of adjusting current-period values for inflation. The "All-Items" CPI is the index most often referred to (i.e., the headline CPI) for representing consumer price inflation. It is generally divided into eight major spending categories, including a "Food and Beverage" category comprising 15.3% of the overall index. The CPI category of "Food and Beverages" is composed of two major subcategories: "All-Food" (which has a relative weight of 14.3% in the all-items CPI) and "Alcoholic Beverages" (1.0%).

The All-Food CPI is the principal indicator of consumer food price changes ( Figure 1 ). The All-Food CPI can be subdivided into the "Food-at-Home" (59.1%) and "Food-Away-from-Home" (40.9%) categories.

The Food-at-Home CPI reflects changes in the prices of foods consumed at home. As such it is the principal indicator of changes in retail food prices in the United States and includes prices of foods purchased at grocery stores, food marts, and big-box discounters (e.g., Walmart, COSTCO, etc.). The Food-Away-from-Home CPI reflects changes in the prices of foods purchased and consumed outside of the home, such as restaurants and other eating and drinking establishments. However, it also includes price changes for ready-to-eat foods purchased at hotels and motels, recreational places and sporting events, vending machines, and school and work cafeterias.

Historic Price Inflation Patterns

Over time, the All-Food and All-Items CPIs have moved together, although the All-Food CPI has been consistently more variable than the All-Items CPI ( Table 1 and Figure 2 ).

Prior to 1960, both of these indexes exhibited higher average inflation rates and more volatility than in recent years. During the 1914-1920 period—which encompassed the international market turmoil associated with World War I—both price indexes recorded double-digit average annual inflation. Food inflation hit its all-time high of 28.7% in 1917 ( Figure 2 ). All-Items price inflation peaked a year later at 18%. Just four years later, starting in 1921, retail prices entered a prolonged deflationary period, with a plunge of -24.2% for All-Food and -10.5% for All-Items, that essentially lasted until 1941 when the wartime shortages of World War II finally renewed retail price inflation.

The variability of the overall CPI and its individual components is important because uncertainty about price changes makes planning more difficult—whether the meal planning of a household, the investment planning of a business, or the policy intervention planning of a federal agency.

During the 1941-1960 period, price inflation remained extremely volatile, alternating between spikes of inflation and steep disinflationary (i.e., deflationary) drops. It was not until 1960 that retail prices stabilized with tolerably mild inflation. However, this proved short-lived as the 1970s saw a return to sharp price spikes generated by an energy crisis and rapid, unexpected shifts in global crop supply and demand. By the early 1980s, retail price inflation had returned to modest levels below 5%. Since 1983 retail prices, as measured by the All-Items and the All-Food CPIs, have been relatively low and relatively stable, except for temporary surges in 1989-1990 and again in 2007-2008.

Overall Inflation Versus Core Inflation

Many economists and policymakers believe that the food and energy components of the CPI are volatile and subject to shocks not easily dealt with through government monetary policy. In response, BLS also reports another price index, referred to as the "core" index because it removes the food and energy price components from the All-Items CPI. The so-called core CPI is thought to be a useful measure of underlying trend inflation in the short run. The food component of the CPI, although more volatile than the overall CPI, is substantially less volatile than the energy component ( Figure 3 and Table 1 ).

Since 1960, the energy price index has been a more volatile component of the All-Items CPI than the food price index by a substantial margin. For example, the energy price inflation standard deviation (SD) of 9.1% was more than double the All-Food SD of 4.1% during the 1960-1983 period, and over six times larger since 1983 (7.9% versus 1.2%).

Since 1983 both the All-Food and the All-Items CPIs have been lower (in terms of average values) and substantially more stable (in terms of SDs) than during the preceding seven decades. In contrast, the energy price index has remained nearly as volatile since 1983 (although at a lower mean level) as it was during the preceding two decades. This is an important point because the energy price index has seen its weighted share of the CPI gradually increase over time and, although energy's current weight share of 9.7% is slightly more than half that of the food weight share of 15.3%, energy price inflation is far more insidious than food inflation to the extent that energy costs figure in the retail price of practically every other component of the CPI.

Consumer Income and Expenditures

A household allocates its available income across a range of expenditure, savings, and investment choices. As mentioned earlier, food expenditures as a share of a household's total budget are an indicator of sensitivity (or vulnerability) to unexpected food price changes. At the national level, food budget share (via Engel's law) can be used as a general indicator of welfare among nations.

Food as a Share of Consumer's Budget

U.S. consumers have seen their "well-being" improve substantially over the past 80 years ( Figure 4 ) as measured by both food budget share and real disposable personal income (DPI) per capita. However, these national averages ignore any potential income distribution issues.

In 2013 total U.S. DPI was $12,505 billion, or $39,518 per capita—in inflation-adjusted 1982-1984 dollars this equaled nearly $17,000 per capita DPI. On average, 9.8% of disposable personal income was spent on food in 2013. The U.S. food share of real DPI has fallen from a high of 25.2% in 1933 to under 10% since 2000, while the average DPI per capita (in 1982-1984 dollars) has risen from $2,838 in 1933 to nearly $17,000 by 2013. Based on 2013 Consumer Expenditure Survey (CES) data ( Table 2 ), average food outlays of $6,602 per household accounted for 13.0% of average total consumer expenditures of $51,100 per household. The difference between the two food-budget-share estimates (9.8% based on DPI versus 13.0% based on CES total expenditures) is due to how disposable income and food expenditures are calculated for each of these indicators.

The share of household All Food and Food-at-Home expenditures ( Table 2 ) varied across income quintiles, in accordance with Engel's law—that is, each succeeding higher income quintile increased its absolute dollar expenditures on food, but at a decreasing rate such that the Food-at-Home budget share declines across higher quintiles. For example, the lowest 20% of U.S. households spent $2,514 on Food-at-Home , or 11.4% of their average total expenditures of $22,393 in 2013, whereas the highest 20% of households spent $6,058 on Food-at-Home , or a 6.2% share of their average total expenditures of $99,237. However, the budget shares for Food-Away- f rom-Home do not fully comply with Engel's law—they decline across income quintiles until the third income quintile, then decline until the fifth quintile. This pattern suggests that other factors (possibly lifestyle and/or work-related) are influencing Food-Away- f rom-Home spending choices.

In summary, BLS data show that lower-income U.S. households tend to spend a larger share of their food budget on Food-at-Home consumption and are thus more vulnerable to unexpected retail food price increases (this is discussed further in the next section).

At-Home Versus Away-from-Home Consumption

U.S. households have shown a strong propensity over time to increase their share of annual food consumption outside of the home ( Figure 5 ). With the exception of a brief period following the end of World War II, the portion of the national food budget spent on food consumption away from the home has steadily increased from 12.7% in 1930 to an estimated 43.2% in 2013.

This phenomenon is associated with:

increasing per-capita disposable income, increasing female participation in the labor force, more two-earner households, increased advertising and promotion by large food-service chains, increasing time constraints on household members (e.g., longer commutes, increased work hours and less leisure time, etc.), the smaller size of U.S. households, and the increased availability of relatively low-cost, fast-food establishments.

The tendency for increased Away-from-Home food consumption has important implications for consumer responsiveness to price and income changes, as well as for household nutrition. This is because prices of Food-at-Home purchases are significantly more volatile than are prices of food-away-from-home purchases ( Table 1 and Figure 6 ).

ERS research suggests that Away-from-Home expenditures are typically higher for single-person households and households containing multiple adults without living-at-home children. By implication, households with living-at-home children typically rely more on Food-at-Home consumption (as a share of their budget) and are thus more vulnerable to the normally higher price variability associated with retail food prices.

International Comparisons

A comparison of food budget shares (based on Food-at-Home expenditures) from over 70 countries ( Table 3 ) suggests that, on average, the United States has achieved a higher level of social welfare (based on this particular indicator) than any of the other countries in the database.

The food budget share is only one indicator of national welfare and ignores any unfavorable distribution of the food expenditure share (should any exist). Even the lowest 20% of U.S. households, on average, spent less than 12% of their budgets on at-home food consumption in 2013 and, thus, appear relatively well-off in food terms based on this particular international standard ( Table 2 ).

Readers should note that this cursory assessment is aggregate in nature and does not exclude the possibility that there are food-deficient individuals within the lowest 20% quintile of the U.S. population. According to ERS, in 2012, an estimated 14.5% of U.S. households were food-insecure at least some time during the course of the year—meaning that the food intake of one or more household members was reduced and their eating patterns were disrupted at times during the year because the household lacked money and other resources for food.

Recent Food Price Inflation

This section provides a discussion of recently observed food price inflation, first based on an annual aggregate perspective, then from a monthly disaggregate perspective that examines price inflation for both Food-at-Home versus Food-Away-from-Home and major food groups.

Annual All-Food Versus All-Items Price Inflation

As a general rule, the All-Item and All-Food CPIs tend to move together. Following a relatively tumultuous period of price inflation in the late 1980s, both price indexes entered an extended period of relative stability. From 1991 through 2006, the All-Food CPI measured average annual inflation of 2.5%, compared with 2.7% annual average All-Items price inflation ( Figure 7 ).

Rapidly Inflating Global Commodity Markets, 2006 to 2008

Several economic factors emerged in late 2005 that began to gradually push market prices higher for both raw agricultural commodities and energy costs. These factors included the rapid development of the U.S. biofuels sector, as well as rising consumer incomes, not just in the United States but globally, which sparked demand for meat and dairy products, food and feed grains, as well as energy and transportation resources, and a wide assortment of raw materials ranging from minerals and metals to coal and petroleum. Driven largely by these demand forces, both general inflation and food price inflation began to accelerate in 2007 and reached a peak in 2008 when the All-Items CPI reached 3.8%, highest since 1991, and the All-Food CPI peaked at 5.5%, highest since 1990 ( Figure 7 and Figure 8 ).

For a given level of income, higher prices mean lower effective purchasing power, since the same household budget will now acquire a smaller volume of products. The negative aspects of the sharp rise in retail food prices that occurred in 2007 and 2008 were magnified by a global financial crisis that emerged in 2008 and led to declines in both real (i.e., inflation-adjusted) gross domestic product (GDP) and real household disposable personal income (DPI)—after 15 consecutive years of positive growth both aggregate income indicators fell modestly in 2008, real GDP by 0.3%, and real DPI per capita by 0.2% ( Figure 9 ).

The 2008 Financial Crisis Triggers a Severe Recession and Price Deflation

The situation of sharply rising prices through the first half of 2008 came to a sudden halt when the financial crisis hit U.S. and global commodity and financial markets in mid-2008 leading to a severe economic recession in 2009. Annual average real GDP declined by 2.8% in 2009, the sharpest decline since 1946 ( Figure 9 ). Real DPI per capita also plunged downward in 2009, falling by 1%, sharply reducing average consumer purchasing power.

The economic downturn also manifested itself in a decline in household wealth due to sharply lower real estate values, tighter business and consumer credit, stagnant wage rates, and rising unemployment numbers ( Figure 10 ). Unemployment is generally a lagging indicator in that it moves slowly and with a substantial delay relative to an economic downturn. This is primarily because employers need several months to determine the permanency of an economic downturn before idling productive resources including laying off workers. As a result, the U.S. unemployment rate associated with the economic recession of 2008 and 2009 did not peak until 2010, when it reached 9.6%. From 1995 to its upturn in 2009, the unemployment rate had averaged 5.1%.

Strong Inflationary-Deflationary Cycles Have Emerged Since 2008

Monthly retail food price inflation responds with lags of up to several months to farm-level price changes in their underlying raw commodity markets. This is because, in part, the prices for raw commodities must work their way through the marketing chain to the retail level. Also, food processors and retailers are traditionally slow to pass on price decreases that they experience at the wholesale level for several reasons, including substantial inherent operating risk associated with volatile markets.

Prices for most farm-level agricultural commodities peaked in early 2008, then began a steady decline through 2010 reflecting abundant supplies, as well as the economic crises and diminished consumer purchase power. However, most retail prices were slow to reflect farm-level commodity price declines, and it was only in late 2008 that retail prices began to significantly retreat for most foods. As a result, annual retail food price inflation peaked at 5.5% in 2008 before falling to 1.8% in 2009 and 0.8% in 2010 ( Figure 8 ).

Monthly price data ( Figure 11 and Figure 12 ) more clearly show the strong inflationary and deflationary cycles that have dominated food price movements since 2008. After spiking up sharply during 2008, sharply lower raw commodity and energy costs combined with weak domestic and global economies to reduce inflationary pressures by mid-2009 for both the All-Items and All-Food price indexes. The change in month-to-month retail food prices declined precipitously through 2009 even though farm prices had stabilized by early 2009. The downward monthly price inflation trend reversed itself in mid-2009; however, average annual food price inflation continued to fall, hitting 0.8% in 2010. However, the All-Items CPI was subject to much stronger deflationary pressures than the All-Food CPI, particularly from weakening energy markets. As a result, the disparity between the two indexes widened in 2009 as the All-Items CPI fell at an annual rate of -0.4% ( Figure 7 ).

By late 2009 global economies resumed growing, albeit slowly, followed in 2010 by more robust growth in the U.S. economy ( Figure 9 ), thus reversing the deflationary price pattern. Because of the lags in the price-signal response process (referred to as price transmission by economists) described earlier, the price deflationary trend persisted into 2010 and provided some budgetary relief for households with employed members. However, surging unemployment numbers (also lagging well behind the general economy) meant that many households were unable to take advantage of food price declines.

By late 2010, prices for most food groups had resumed their upward surge into 2011 ( Figure 11 ) before sharply slowing their growth due to another bout of general economic weakness and persistently high unemployment. The unemployment rate peaked at 9.6% in 2010 but declined slowly to 8.9% in 2011 and 8.1% in 2012—still historically high levels. The U.S. and global economies remained sluggish through 2012 and into 2013, dampened by high unemployment, continued financial turmoil in Europe, and a slowing economy in China. This economic turn-around was reflected in declining monthly price inflation data into 2013 ( Figure 11 ). In early 2014, the U.S. economy again rebounded slightly ( Figure 9 ) and with it came a mild rebound in commodity price inflation. However, other major international economies remained weak, with little or no growth. U.S. agricultural exports peaked at record value in 2014, but by the end of the year, international market prospects dimmed. Food price rises slowed considerably and turned negative in early 2015. According to USDA, U.S. food price inflation is projected in the 2% to 3% range in 2015 ( Table 4 and Figure 8 ).

On-Again, Off-Again Economic Activity Drives Retail Food Price Pattern

Retail food prices have clearly been responding to the on-again, off-again demand driven by the cyclical nature of U.S. and global economic activity. Monthly All-Food price inflation data (adjusted for seasonality) are presented in Figure 12 , but for a longer time period and accompanied by their 11-month moving average (MA).

The 11-month MA series reveals three recent pronounced inflationary-deflationary trends for retail food prices that have occurred since 2005:

1. a strong upward inflationary trend that began at the end of 2005 and persisted through June 2008—in line with the demand-driven price rises in global markets for agricultural commodities as well as for energy, transportation, and raw materials; followed by a severe deflationary price pattern from late 2008 until mid-2009, driven by the U.S. and global financial crisis of 2008 and its aftermath; 2. another upward trend starting in late 2010 as U.S. and global economic conditions slowly improved, followed by a decline in inflationary pressure in mid-2011 into 2013—again due largely to sluggish economic growth, stagnant wages, and persistently high unemployment, which combined to weaken consumer purchasing power; and finally 3. food price inflation returning in 2014 due to a strengthening U.S. economy and strong employment gains; followed once again by an apparent economic downturn heading into 2015.

At-Home Versus Away-from-Home Food Price Inflation

As shown earlier ( Figure 6 ), At-Home food prices are substantially more volatile than Away-from-Home food prices (see also Table 1 ). This volatility is apparent, even when using a shorter time period ( Figure 13 ).

When displayed in terms of monthly price changes, the pattern exhibited by At-Home food price inflation ( Figure 13 ) appears very similar to the pattern for All-Food price inflation ( Figure 11 ), although the At-Home food price movements are more extreme. In contrast, monthly Away-from-Home price inflation is much more stable. Note that both At-Home and Away-from-Home monthly price inflation show a distinct downturn beginning in July 2008 and running into early 2009, followed by a steady recovery into 2011. However, the monthly Away-from-Home price inflation does not show the same declining trend that started in mid-2011 for At-Home monthly price inflation, nor the follow-on downturn in early 2015.

Supply-Side Influences on Food Price Inflation

The demand-side influences of income growth (and decline) and the global financial crisis that emerged in late 2008 have already been discussed. On the supply side, food price inflation is the result of dynamic forces that occur both at the farm, where the raw agricultural ingredients for retail food items are produced, and along the marketing chain, as the farm output is transformed and moved to the retail customer. An array of costs are layered on top of the price of the raw agricultural commodity, including handling, transportation, storage, and processing, as well as the insurance, financing, and advertising costs necessary to move the product to the retail customer.

The relative importance of these marketing costs varies widely for different retail food products depending on the degree of processing and transformation (i.e., cleaning, packaging, shipping, advertising, etc.). As a result, economic forces such as higher energy costs or increased labor rates do not impact all food categories equally. More highly processed food products, where the farm-level commodity value contributes a small share to the final price, are less influenced by farm-level price changes than are those food products that have very little marketing and processing as part of the final retail product—for example, eggs, fresh meat, and certain fruits and vegetables.

Annual Price Movements by Major Food Categories

Food price inflation is not felt evenly across all food groups, but varies widely in terms of both the timing and the relative magnitude. However, the patterns displayed for At-Home food prices in Figure 13 are for the most part replicated across the individual food groups of Table 4 .

In 2008, at-home food prices inflation of 6.4% was the highest since 1990. In 2009 and 2010, most food groups experienced very modest price inflation (0.5% and 0.3%, respectively); several categories experienced price deflation. Food price inflation turned upward sharply across most food categories in 2011. Food price inflation returned to its long-run trend of about 2.5% in 2012 with the notable exception of beef and poultry products, and fats and oils, which were up sharply. High feed costs and lack of pasture during 2012 (due to a severe drought across the Plains States and Cornbelt) contributed to substantial declines in livestock and poultry populations and cut into cattle feedlot and chicken grow-out profit margins, thus sparking concerns—but not shortages—at the retail level. Tight animal product supplies in 2011 and 2012 supported most animal product prices at above average price inflation levels during those years. As feed supplies rebounded in 2013, the hog, poultry, and dairy sectors began to expand (the beef sector is constrained by biology from rapid expansion). In 2014, prices moderated for most food categories except for dairy and livestock products, most notably beef prices, which surged at a 12.1% rate. Most commodity prices (with the exception of beef) are expected remain in the 2% to 3% range in 2015.

Monthly Price Movements by Major Food Categories

Annual averages can cloud over substantial inter-year price movements. As a result, it is worthwhile to glance over the monthly price indexes by major food group to get a better sense of the general pattern of retail food price movements across the various food groups.

A "common theme" across the various food product prices in the following charts is a sharp deflationary move associated with the fiscal crises of 2008 and subsequent recession, followed by a slow but sustained upward price trend since 2010, with a flattening of the upward price movement since 2012 (meat being the exception with its continued upward trend into 2015). Also, evidence (as presented in the following charts) suggests that highly processed foods more consistently adhere to steady, stable upward price trends dependent on general economic conditions. In contrast, prices for less-processed retail food products—such as eggs, milk, and fresh fruits and vegetables—respond far more quickly to changes in both farm commodity prices and economic conditions.

Monthly price indexes ( Figure 14 ) for the four principal food groups—cereals and bakery products; meats (including beef, pork, poultry, and seafood); dairy products (including milk, cheese, ice cream, and other); and fruits and vegetables (including fresh as well as processed)—reveal variations of the "common theme" of price movement.

The meat price index has shown the strongest increase since 2008, rising 32% by 2015. The cereals and bakery product price index has shown the least volatility. The dairy price index rose declined sharply from mid-2008 through 2009, before moving steadily upward from mid-2009 until 2015. The fruit and vegetable price index has shown considerable volatility. A general upward pattern has been punctuated by significant deflationary movements during 2007, 2009, 2010, late 2011, and again heading into 2015.

Animal product prices ( Figure 15 and Figure 16 ) show a similar pattern of decline between 2008 and 2010, before rising into 2015. Steady U.S. economic growth coupled with relatively tight animal product supplies sustained retail prices for most animal products through 2014.

Beef and pork prices have shown considerable strength since early 2010 although pork prices temporarily tailed off during 2012-2013. Low cattle populations are expected to support beef prices through 2015. However, the rapid expansion of the hog sector in 2013 and 2014 has pushed supply past current demand, thus triggering lower prices heading into 2015. Poultry prices have been more stable and have ticked upward since late 2010, helped in part by high beef prices and consumer switching of meat choices. Perhaps the most dramatic and volatile of the individual animal product price indexes has been eggs ( Figure 15 ), which underwent a severe deflationary period from mid-2008 through 2009 before growing steadily into 2015. Stronger egg production coupled with the global economic crisis dampened prices starting in the latter half of 2008. General economic growth has pulled egg prices upward steadily since mid-2009, just surpassing their mid-2008 peak in June 2013.

The individual components of the dairy group ( Figure 16 ) followed distinctly different patterns. Cheese and fresh milk prices exhibited deflation from mid-2008 until late 2009 due to initially tight supplies and expensive feed costs, followed by increased supplies and a sharp drop in demand. A resumption of U.S. and global economic growth (albeit slow) has helped sustain price increases in late 2009. The dairy sector experienced a slow down with the stalling economy in 2012 and 2013 before surging upward in 2014 as the general economy surged.

The overall dairy index mimics closely the cheese index since cheese is the principal use category and accounts for much of dairy price formation. Prices for highly processed ice cream showed a far more stable pattern and have generally reflected overall economic conditions.

Similar to ice cream, the price index for processed fruits and vegetables ( Figure 17 ) has tended to follow general economic conditions. In contrast, the price indexes for both fresh fruit and fresh vegetables have exhibited greater volatility, incorporating aspects of both the general economy as well as supply and demand conditions for the raw commodities. The ongoing drought in California is likely to have a major impact on the state's agricultural production. Long-term moisture deficits across most of the state remain at near-record levels. Because California is the major U.S. producer of fruit, vegetables, tree nuts, and dairy, the drought has potential implications for U.S. supplies and prices of affected products. USDA currently projects combined U.S. fruit and vegetable prices to rise by 2% to 3% in 2015, with fresh fruits projected up 2.5% to 3.5%. The price indexes for highly processed snacks, sugar and sweets, and fats and oils ( Figure 18 ) are similar to other processed food products or products with inelastic demand—they tend to follow general economic conditions. Again, the prepared-food group (which includes frozen and freeze-dried prepared foods) and the carbonated beverages indexes tend to follow the swings in consumer demand as reflected by the general economy ( Figure 19 ). Carbonated beverages have shown greater price inflation since 2010 compared with prepared foods which are more dependent on the U.S. market. Coffee prices are strongly linked to international supply and demand conditions and have exhibited greater volatility as a result.

Effect of Retail Price Changes

As stated earlier in this report, lower-income consumers who spend a significant share of their household budget on food are likely to be impacted more severely by rising food prices, to be more responsive to price changes, and to be forced to make more difficult budgetary tradeoffs than high-income consumers with lower food budget shares.

The United States has several domestic programs that are designed to help consumers meet their household food and nutrition needs during periods of economic downturn when household purchasing power is diminished. In addition, the United States has a history of providing significant international food aid during periods of famine or food shortages throughout the world. Both domestic and international U.S. food assistance programs are directly influenced by food price inflation.

Price Inflation Escalator Clauses Often Respond with a Lag

Many wages and salaries, as well as federal programs (including several domestic food assistance programs), are linked to price inflation through escalation clauses in order to retain their purchasing power. For households where income does not keep up with price inflation, declines in purchasing power are both real and immediate. However, even for households with escalation clauses that adjust incomes or benefits for price inflation, there is a time lag between the time the price inflation is measured and the time when the wage or program benefit is adjusted upward to compensate. As a result, for households with incomes or federal benefits linked to price inflation escalators, higher prices can cause a short-term decline in real purchasing power. This is most meaningful when prices are accelerating. When prices are falling, as during a deflationary period, consumers with fixed incomes realize gains in real income (provided that they are not subject to wage cuts or layoffs).

Federal Spending for Domestic Food Assistance Programs18

The U.S. Department of Agriculture (USDA) administers several domestic food and nutrition programs that provide a nutritional safety net for millions of low-income households, as well as schoolchildren and nutritionally vulnerable groups such as pregnant and/or lactating mothers. The past decade has seen a tremendous expansion in use of USDA's food and nutrition assistance programs—since FY2000, expenditures for food and nutrition assistance have more than tripled ( Figure 20 ).

Federal expenditures totaled $109.2 billion in FY2013 and marked the 13 th consecutive year in which food and nutrition assistance expenditures exceeded the previous historical record. Total outlays declined slightly to $103.6 billion in FY2014.

USDA's expenditures for food and nutrition assistance programs can be grouped into five main categories: (1) the Supplemental Nutrition Assistance Program (SNAP); (2) school food programs (including the National School Lunch Program and the School Breakfast Program); (3) the Special Supplemental Nutrition Program for Women, Infants, and Children (WIC); (4) the Child and Adult Care Food Program; and (5) food distribution programs including Nutrition Services Incentive Program (NSIP), Food Distribution on Indian Reservations (FDPIR), Commodity Supplemental Food Program (CSFP), and the Emergency Food Assistance Program (TEFAP). SNAP is the largest of these programs and accounted for 73% of federal food and nutrition assistance spending in FY2014. SNAP provides monthly benefits for eligible participants to purchase food items at authorized food stores.

A substantial portion of spending on food and nutrition assistance programs is in the form of entitlements (i.e., mandatory spending) whereby eligibility and participation rates govern outlays. For mandatory programs, food price inflation leads to more spending on domestic assistance efforts. Increasing prices encourage those who are eligible, but not participating, to enroll. They also translate directly (albeit with a time lag) into higher benefit payments and per-meal subsidies for "entitlement" programs in which benefits are indexed to food-price inflation. However, many of these programs also include discretionary components where outlays are determined through the annual appropriations process. Increasing prices place pressure on appropriators to provide more funding to support caseloads for "discretionary" programs like the WIC program.

The 2008-2009 global economic crisis—with its higher unemployment, income loss, and lower effective household purchasing power—following on the heels of higher retail prices, brought on higher participation rates and greater costs for domestic food aid programs. Although the U.S. economy resumed growth during 2010, unemployment ranks have been slow to follow. This is reflected in high SNAP participation levels, which hit an all-time high of 47.8 million (or 15.2% of the U.S. population) in December 2012. SNAP monthly benefit costs have grown from $2.4 billion in May 2006 to a peak of $6.5 billion in November 2012, with average per-person monthly benefit spending rising from $93 to $135.73. Other domestic food assistance programs have seen similar increases in participation (and costs).

Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps)

The SNAP, with over $74.1 billion in outlays in FY2014, is the largest of the federally supported domestic food assistance programs. SNAP benefits normally are indexed annually (each October) for changes in the cost of USDA's least costly food plan, the "Thrifty Food Plan" (TFP). However, the increases are lagged by three months in reflecting rising food costs—they were (by law) based on prices from the immediately previous June. Thus, there is a three-month gap between the calculation of the price inflation index in June and its use to adjust SNAP benefits in October.

In recognition of the lag in the inflation index for SNAP benefits, increased food needs, and reduced income, the 2009 American Recovery and Reinvestment Act (ARRA; P.L. 111-5 ) provided additional support for domestic food assistance programs: an estimated $11.5 billion for FY2009-FY2010 and $20.8 billion through FY2019. SNAP was the primary recipient of this new money, most of which is being used to pay for added benefits, loosened eligibility standards, and administrative costs.

However, these increased SNAP benefits were reduced as part of P.L. 111-226 (a law providing funding for education jobs and Medicaid) and were further reduced by child nutrition reauthorization legislation (the Healthy, Hunger-Free Kids Act of 2010; P.L. 111-296 ). As a result of these cuts, in November 2013 SNAP benefits will revert to what basic SNAP law directs (i.e., as calculated using annual food-price inflation).

Child Nutrition

Federally supported child nutrition programs (e.g., the National School Lunch Program, the School Breakfast Program, the Special Milk Program, Child and Adult Care Food Program, and the Summer Food Service Program) and initiatives reach over 30 million children annually. In FY2014, federal spending on these programs totaled nearly $20 billion, the second-largest federal commitment to domestic food assistance. The basic goals of federal child nutrition programs are to improve children's nutrition, increase lower-income children's access to nutritious meals and snacks, and help support the agricultural economy.

Federal payments for meals and snacks served to children are indexed every July to food-price changes reflected in the Food-Away-from-Home component of the CPI over the 12-month period ending each May. Commodity support also is indexed annually based on the Bureau of Labor Statistics' Producer Price Index for five major food components (cereal and bakery products, meats, poultry and fish, dairy products, processed fruits and vegetables, and fats and oils).

The WIC Program

Unlike the SNAP and child nutrition programs, which receive mandatory funding, the WIC program is funded from discretionary sources. Spending depends on annual appropriations, based largely on estimates of participation and the cost of the food packages that are purchased with WIC vouchers. In FY2014, $6.2 billion was spent on WIC, including $4.3 billion in food costs and $1.9 billion in nutrition service and administrative costs. The average monthly food cost per participant was $43.65.

The value of benefits is not indexed to inflation, per se. Rather, WIC vouchers are redeemable at whatever the participating retailer charges for the items covered by the vouchers, which differ according to the type of recipient (e.g., pregnant mother, infant, and child). As a result, the cost of WIC vouchers reflect food price changes without the time lag built into other inflation-indexed nutrition programs. Just as important, WIC vouchers are highly specific as to the food items they cover and have a relatively heavy emphasis on certain types of food—for example, dairy items and infant formula are major components.

In recent years, the cost of WIC food vouchers has varied a great deal, largely because of changes in dairy-related food prices. The average per-participant monthly cost of vouchers has ranged from $33.06 in FY2000 to $46.69 in FY2011. However, the annual percentage increase has actually declined in some years (FY2005 and FY2006) and increased substantially in other years. Given this significant volatility, it is difficult to produce specific estimates of the effect of food price inflation on WIC program costs. Although WIC spending is discretionary, Congress has historically shown a willingness to appropriate whatever amounts are necessary to meet costs imposed by increased participation or food costs.

Additional Commodity Assistance Programs

USDA operates several additional food assistance programs targeting low-income or vulnerable populations. The Emergency Food Assistance Program (TEFAP) and meal service programs under the Older Americans Act (e.g., "meals-on-wheels" and meals served to seniors in congregate meal settings) provide key food assistance support for vulnerable groups. The Commodity Supplemental Food Program (CSFP) provides foods purchased by USDA to low-income infants and children up to age six, low-income pregnant and postpartum women, and to low-income senior citizens. The Senior Farmers' Market Nutrition Program (SFMNP) provides coupons to low-income seniors that can be exchanged for fresh, nutritious, unprepared, locally grown fruits, vegetables, and herbs at farmers' markets, roadside stands, and community-supported agriculture programs. Like WIC, these programs are discretionary, and rising need and higher food prices have placed pressure on appropriators to add to federal funding.

Foreign Food Aid

USDA's international food and nutritional assistance activities are funded by discretionary appropriations—primarily under the Food for Peace Act (P.L. 83-480) as amended by the 2014 farm bill (Agricultural Act of 2014; P.L. 113-79 ). Average annual spending on U.S. international food aid programs has average $2.6 billion since FY2006.

Food aid usually takes the form of basic food grains—such as wheat, sorghum, and corn—and vegetable oil, as well as blended and/or processed food products. Because foreign food aid is a budget value and not a food volume, its effective "purchase power" for acquiring U.S. agricultural commodities in domestic wholesale markets for delivery to foreign countries is diminished by food price hikes without additional appropriations. Also, higher energy costs increase the shipping costs to move food purchases and food aid to foreign countries further limiting the budgetary purchase power of food aid dollars. Unlike some domestic nutrition programs, foreign food aid does not have an escalation clause to adjust for changing costs.

U.S. food aid also has certain delivery requirements that add to the program's vulnerability to general price inflation. Ocean transport of government-generated shipments is governed by the Cargo Preference Act, P.L. 83-644 (August 26, 1954). This act contains permanent legislation requiring that at least 50% of the volume of U.S. agricultural commodities financed under U.S. food aid programs ship on U.S.-flag vessels. Excess costs are usually incurred because freight rates on U.S.-flag vessels are generally higher than on foreign commercial ships.

There is growing interest from the Administration and certain Members of Congress, but also from the international development community, for the United States to switch its food assistance program over to cash rather than kind. Such a switch would avoid the costly effects that domestic food price inflation has on the food aid budget, while sidestepping completely the obligation to ship food aid on more expensive U.S.-flagged vessels.