Food Inflation: Fasten Your Seatbelts

You’ve read about rising food prices in the media. Your distributors’ invoices tell you food inflation is already underway. Now it’s decision time. Should your restaurant absorb these costs, pass them along or adjust portion sizes instead? Let’s look closer at the USDA’s latest food cost inflation forecast for some guidance.

The United States Department of Agriculture’s Economic Research Service (ERS) releases the numbers on food price inflation on the 25th of every month. We’re reprinting their analysis of the May report below. If you want to skip the expert ERS analysis and go directly to the numbers, head here: http://www.ers.usda.gov/Briefing/CPIFoodAndExpenditures/Data/cpiforecasts.htm

If not, here’s what the USDA says these numbers mean:

“In 2011, the Consumer Price Index (CPI) for all food is projected to increase 3 to 4 percent. Food-at-home (grocery store) prices are forecast to rise 3.5 to 4.5 percent, while food-away-from-home (restaurant) prices are forecast to increase 3 to 4 percent. Although food price inflation was relatively weak for most of 2009 and 2010, cost pressures on wholesale and retail food prices due to higher food commodity and energy prices, along with strengthening global food demand, have pushed inflation projections for 2011 upward.

“The all-food CPI increased 0.8 percent between 2009 and 2010, the lowest food inflation rate since 1962. Food-at-home prices increased by 0.3 percent--the lowest annual increase since 1967- -with cereal and bakery product prices declining 0.8 percent and processed fruit and vegetable prices dropping 1.3 percent. Food- away-from-home prices rose 1.3 percent in 2010, the lowest annual increase for restaurant prices since 1955.

“The CPI for all food increased 0.4 percent from February March to April 2011, increased 0.7 percent from February to March 2011, and is now 3.2 percent above the April 2010 level. The food-at-home CPI increased 0.4 percent in April 2011 and is up 3.9 percent from last April, while the food-away-from-home index was up 0.3 percent in April 2011 and is 2.1 percent above last April. Food commodity and energy price increases over the past 10 months have caused most of the recent increases in grocery store prices. The all-items CPI was up 0.6 percent in April, mostly due to higher food and energy prices, and is 3.2 percent above the April 2010 level.

“Beef prices increased 1.2 percent in April and are 10.4 percent above last April, with steak prices up 8.2 percent and ground beef prices up 12.1 percent. Pork prices decreased 0.3 percent in April but remain 10.4 percent above last April’s level. Poultry prices increased 0.9 percent in April and are 2.3 percent above prices last year at this time, with chicken prices up 1.8 percent and other poultry prices (including turkey) up 4.1 percent. As commodity prices and input costs have risen over the past 10 months, beef and pork prices are now significantly higher than in 2010. Increased inflation for beef and pork products is expected for most of 2011, as reflected in ERS’s forecasts--beef prices are now projected to increase 7 to 8 percent and pork prices 6.5 to 7.5 percent in 2011.

“Egg prices increased 0.7 percent in April 2011, marking the first price increase in four months. Egg prices are now 4.8 percent above the April 2010 level.

“Dairy prices were up 1.7 percent from March to April 2011, compared with a 1.3-percent increase from February to March 2011. Dairy prices are now 6.3 percent above the April 2010 level. Within the dairy category, prices changed as follows in April: milk prices were up 2.2 percent and are 10.9 percent above last April’s prices; cheese prices were up 2.2 percent and are 4.6 percent above last April’s level; ice cream and related product prices were up 1.5 percent and are 5.1 percent above last April’s level; and butter prices decreased 1.0 percent this month and are 16.2 percent above last April. In 2010, dairy prices were up only 1.1 percent from 2009 (following a 6.4- percent decline from 2008 to 2009). However, higher projected prices for farm milk in 2011 have led ERS to revise its forecast upward to 5 to 6 percent for retail dairy product prices in 2011.

“Fresh fruit prices increased 0.8 percent in April, and the fresh fruit index is up 1.6 percent overall from last year at this time, with apple prices up 1.0 percent, banana prices down 0.2 percent, citrus fruit prices down 2.1 percent (after a mostly seasonal 8.5-percent increase from February to March 2011), and other fresh fruit prices up 2.2 percent. Fresh fruit prices fell in 7 of the past 15 months, leading to an overall fresh fruit price decline of 0.6 percent in 2010. However, current forecasts predict some price inflation for fruit prices in 2011. The fresh vegetable index decreased 3.5 percent in April, due in large part to a seasonal shift away from those crops affected by harsh winter weather. Since last year at this time, fresh vegetable prices are up 4.5 percent, with potato prices up 13.4 percent, lettuce prices up 9.9 percent, tomato prices up 9.7 percent, and other fresh vegetable prices down 1.2 percent. Processed fruit and vegetable prices decreased 0.6 percent in April and are 0.9 percent above the April 2010 level.

“Cereal and bakery product prices were up 0.2 percent from March to April 2011 and are up 2.2 percent from last year at this time, with bread prices up 4.8 percent and breakfast cereal prices up 1.7 percent over the past year. Although cereal and bakery product prices declined 0.8 percent overall in 2010, higher wheat commodity costs should begin to affect cereal and bakery product prices over the next few months, causing prices to rise 3.5 to 4.5 percent overall in 2011. Sugar and sweets prices were down 0.8 percent in April and are 1.5 percent above last April. Within the nonalcoholic beverages category, prices changed as follows in April: carbonated drink prices were down 0.7 percent and are up 0.9 percent from April 2010; coffee prices were up 3.6 percent and are up 13.8 percent from last April; and nonfrozen noncarbonated juices and drinks prices were up 1.0 percent in April and are up 1.2 percent from the April 2010 level.

“ERS regularly updates and provides food price forecasts for the short-term period of 12 to 18 months. These forecasts are a composite of formal model results and judgment. Monthly Bureau of Labor Statistics’ indexes for all food, food away from home, food at home, and 15 food at home categories are used in conjunction with ERS analysis to adjust the current short-term forecasts for each of the food categories.”

Yes, there’s a lot of detail here. But the story is straightforward. These numbers are telling you higher food prices are on the way. Now’s the time to get your restaurants sourcing and pricing strategies in place.