smart spending

Is inflation higher than you think?

That means coffee prices for consumers will head yet higher. J.M. Smucker announced a price increase of 10 percent on brands Folgers and Dunkin' Donuts in early February.

Adverse weather conditions and increased global demand have increased prices for corn, wheat and soybeans, while instability in the Middle East has sent oil prices through the roof.

Food vs. gas prices

Consumers will notice one much more than the other: The price of a barrel of oil has a much more direct impact on their wallets than a bushel of corn, soybeans or wheat.

"Petroleum is a bigger slice of what people pay for in a tank of gas than wheat is in a box of cereal. If petroleum prices double, then the cost of gas goes up by 60 (percent) or 70 percent," Hampel says.

If wheat prices double, a box of cereal won't suddenly be jacked up to twice the price.

"The actual wheat and corn and grain in a box of cereal (accounts for) 3 percent of the total price. If grains double in price and nothing else happens, that would be a 3 percent increase in the cost of that box of cereal from a doubling of the commodity prices," Hampel says.

Processing, packaging and transporting contribute much more to the cost of food than do food commodities.

"Core commodity prices for food have been going up significantly for the past seven months. Those prices have been rising at an annual rate of 70 percent," says Hampel.

The food on the shelves at grocery stores, on the other hand, only increased by about 2 percent or 2.5 percent over that period, he says.

Scott H. Irwin, the Laurence J. Norton Chair of Agricultural Marketing at the University of Illinois at Urbana-Champaign, agrees.

"Outside of milk, meat, and eggs and fresh vegetables, there is a great deal of packaging and transportation that is involved in going from the farm to the grocery store. On average, about 80 percent of the cost of the items in a U.S. grocery store is nonfarm costs," says Irwin.

Commodity price impact varies

The price of raw materials is more apparent in the cost of unprocessed foods. For instance, a bad growing season for oranges can mean skyrocketing orange juice prices.

But in some cases, the path between commodity prices and consumer pocketbooks is a more meandering one. Consider corn. Its price has increased due to bad weather. And though it's used in a plethora of processed foods, corn is also a major staple for farm animals. Depending on the species of livestock, it could be some time before higher corn prices translates into higher meat prices.

"Long after corn prices go back down sometime in the next year from $6 to $4 a bushel, you will still be feeling the effects of $6 corn in the cattle and hog market for another year or two at least," Irwin says.

Whether it's a direct or indirect hit to consumer pocketbooks, higher commodity prices do mean higher prices for consumers, for the short and long terms. Commodity prices can also be a barometer for global inflation.

"Commodity price changes can be the canary in the coal mine," says Hampel, "that can tell you that there are inflationary pressures in the rest of the world."

The reality for consumers: Prices for many items will be higher and, depending on how you shop, inflation may feel higher than the official index number.


          Connect with us

Connect with us