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Corn+Soybean Digest

Economy, Lower Commodity Prices Slowing Food Cost Growth

After a couple years of above-average food-price inflation, Corinne Alexander, a Purdue University agricultural economist, believes the inflation rate will return to normal next year.

Alexander estimated 2010 food prices would increase between 2.5% and 3.5%, not near the records that were set in 2008 of 5.5%. The 10-year average for food-price inflation for 1997-2006 is about 2.5%, she says.

"One reason we're not seeing prices go up so much right now is we had a massive recession that caused people to cut back," Alexander says.

Alexander says that in July of this year, the cost of food purchased for the home decreased 0.9% over the same month last year, much lower than usual and lower than the September 2008 peak of 7.6%.

Food purchased away from home, such as in restaurants, increased 3.2% this past July over the same month last year. That was about average, and lower than the December 2008 high of 5%.

Several factors have been driving the decline in those inflationary numbers. Alexander says significantly lower commodity prices, as well as the lower cost of fuel, have been major contributors.

"Grain prices peaked last summer. We had $8 corn; we had $13 wheat," Alexander says. "We also had $147/barrel oil."

The recession also slowed growth in developing countries, reducing the demand for meat and other food exports. That has increased the supply available in the U.S., driving down the price.

"You just can't have rising meat prices with domestic supplies so high," Alexander says. "This year domestic demand weakened because of the recession."

Alexander warns, however, that inflation could go higher based on the economy.

"If the U.S. and world economies start growing and the recession is finished sooner than expected, that will boost inflation," she says.

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