Food price hikes continue apace despite overall inflation fall

Posted by Daniel Palmer on 29th January 2009

Despite a quarterly deflation figure and disinflation for the year to December, food price inflation gathered pace in the closing months of 2008, according to the latest Australian Bureau of Statistics Consumer Price Index (CPI) data.

Australia’s latest official inflation figures showed that while the overall CPI fell 0.3 per cent quarter on quarter (QOQ) – the largest quarterly fall in more than 11 years – food prices rose two per cent (bringing the annual increase in food prices to 5.6 per cent). Woolworths, Australia’s largest supermarket operator also noted yesterday that the annual rate of food inflation had risen in the December quarter (to 4.8%), well above the 3.2 per cent figure reported by the company in the September quarter.

Price increases were registered across all key food categories and across all levels of processed food.

Tim Hunt, senior analyst at food and agribusiness banking specialist Rabobank, reported that food prices had continued to be impacted by the “tail-end ripple effects” of last year’s commodity boom. “What we are seeing in part are the last ripple effects of the extraordinary commodity price boom of 2007/08,” he advised. “Global shortages of key food crops drove the cost of commodity food ingredients through the roof during this period, and record oil prices drove up the cost of fuel, energy, and packaging. Inevitably the consumer has had to wear some of that cost increase.”

While the cost of agricultural and oil-derived products fell sharply in the second half of 2008, lags ensured that retail food prices continued to increase through to the end of the year, Mr Hunt said. This observed behaviour reflects at least partly typical lags between ingredient prices and retail prices. “It took more than six months for the phenomenal boom in commodity prices to really start feeding through to supermarket shelves, and similar lags can be expected on the way down,” he noted.

Lags are caused by a range of factors, including delays between spot commodity market price movements and wholesale contract changes, retail contract renegotiation and desire of food processors to restore some margin following a severe squeeze when commodity prices first took off.

“This price ‘stickiness’ is a global phenomenon, with the retail costs of food remaining high or adjusting only slowly downwards in most countries around the world at present,” Mr Hunt said.

More specific factors also influenced price increases in certain food categories in the December quarter: prices of pork and bacon have been pushed up by a combination of rising costs of imported product (following the slump of the Australian dollar) and sharp reductions in the local pig herd in 2008; while seasonal factors and limited supply pushed up the price of fruit and vegetables.

Fruit and vegetables recorded the biggest rises for the quarter – with fruit price hikes of a staggering 8.0% in three months, while cheese and bread recorded the highest rises in the year to December. Bread, however, experienced – along with wine – the lowest price increase in the December quarter, indicating that the fall in the price of wheat from record highs last year is beginning to filter through.

Wine was one of the few food and beverage categories not to experience a strong price increase, with prices remaining flat for the second consecutive quarter as competition between the two major retailers intensified in the face of weaker consumer demand.

Mr Hunt said it was likely that retail price increases across many food categories would stabilise, and in some cases fall, as the year progresses, as most of the forces that drove them up continue to reverse. “Agricultural commodity costs have fallen, plastics pricing has started to ease and distribution costs will fall in line with fuel prices. Weak demand conditions will also encourage retailers and processors to reduce prices to keep product moving. And while a weaker Australian dollar will increase the cost of imported food, this is likely to be more than offset by these factors,” he said. “We expect to see reduced costs of ingredients, fuel and plastics passed on to shoppers as processors compete to sell product in a challenging retail environment and retailers strive to keep consumers moving in through their doors.”

December Quarter 2008: Key Inflation Results; Change on previous quarter; Change on previous year (Source: ABS)
Consumer Price Index; -0.3%; 3.7%
Food Price Index; 2.0%; 5.6%
Milk; 1.2%; 6.3%
Cheese; 2.3%; 11.1%
Bread; 0.2%; 8.2%
Beef and veal; 1.4%; 4.1%
Lamb and mutton; 2.5%; 7.1%
Pork; 2.3%; 6.5%
Poultry; 0.5%; 4.8%
Fruit; 8.0%; 3.9%
Vegetables; 3.3%; 0.7%
Wine; 0.2%; 2.8%
Meals out & take away foods; 1.2%; 5.8%
Non-alcoholic drinks & snack foods; 1.7%; 5.2%