As recession ebbs, inflation flows on food prices

YAKIMA -- Jamie Runge of Yakima always watches prices at the grocery store. But in the coming year, she will be taking an even closer look because prices on food staples such as cereal are expected to sharply rise.

Consumers have enjoyed food prices the past two years that were below normal inflation, and now markets are returning to where they were headed before the recession hit, said Ephraim Leibtag, a senior economist with the U.S. Department of Agriculture in Washington, D.C.

"Now we're back on line. We're going to see more inflationary pressure," he said.

Economists say the increase in the price of food will take a particular toll on lower-income households because they spend a larger percentage of their income on groceries.

Retail food prices -- which are not included in the Consumer Price Index -- are expected to increase because food producers and processors say they no longer can absorb the rising cost of their ingredients.

Last year, it was food producers who saw their wholesale prices climb anywhere from 5 percent to 10 percent -- wheat, grain and soybean all doubled -- while consumers saw little ripple effect at the cash register.

But this year producers will play catch-up, increasing prices anywhere from 3 percent to 5 percent to make up for lost profits last year, said economist Bill Lapp, president of Advanced Economic Solutions in Omaha, Neb.

Rising prices across the board likely will end the lowest rate of annual inflation the country has seen in 18 years: "You've had a pretty good run as a consumer, but I think that's going to change," Lapp said.

Runge, who recently was shopping at Wray's Food & Drug at 5605 Summitview Ave., said she's not worried yet.

"I always pay attention to prices," she said as she pushed a shopping cart occupied by her two small children through the produce section.

"I mean, you have to buy groceries."

Low-income households definitely will feel the impact first, said Peter Bohmer, professor of political economy at Evergreen State College in Olympia. While the average family spends about 10 percent of its income on food, that figure is at least double for low-income families, he said.

"That 5 percent increase really affects low-income people a lot because food is such a big part of their spending," he said. "It hits them much more. It's very significant."

Wray's owner Chris Brown said he is trying to keep his prices competitive in an industry that already operates on razor-thin margins. He said bread prices jumped about a dime a loaf at the first of the year, and cereal prices might climb as well.

Sometimes, to make up their costs, producers reduce the size of packaging without changing the price, he said. For example, two years ago a 6-ounce can of tuna was reduced to 5 ounces but the price remained the same.

"The size of the can didn't really change, they just put less in the can," he said.

Brown said he's watchful of prices at other stores and will adjust his accordingly: "If our milk price goes up, then we look around and see if everyone else's went up," he said.

"We pass on what we can (to customers)," he said. "Sometimes we have to eat it for a while."

Runge will continue her practice of shopping around. She said she buys produce and other perishables at Wray's, but buys most of her dry goods such as bread and cereal in bulk at Costco.

"I end up having to go to three different grocery stores depending on what I'm getting," she said.

The price spike is the result of increasing world demand for commodities at a time when production has faltered. A drought in Russia and floods in Australia have sharply cut the supply of grain and wheat, putting more demand on U.S. markets, said Washington Grain Commission President Glen Squires in Spokane.

"It's just an incentive to push prices up," he said.

The average price of a bushel of wheat last August shot up from $4 to nearly $8, he said. Higher grain prices usually lead to an increase in the price of feed. That forces up the price of beef and dairy products.

The prospect of higher meat prices could change the menu at the Runge house: "Maybe we'll do more pork than steak because it's cheaper," she said.

But there is an upside for some to the increase in prices, Squires said. U.S. export sales last year were 61 percent more than the previous year, up from about 15 million tons of wheat to more than 25 million tons, he said.

And Washington saw the highest wheat production it has seen in 10 years, he said.

"That's a healthy increase in demand," he said. "It's nice to have a plus."