Overall U.S. grocery prices will not rise at all this year — the first time in four decades of records that the inflation rate would hit zero, says the Agriculture Department, pointing to the effects of low petroleum prices, the strong dollar and falling prices for beef, pork and poultry. Retail food prices were flat or fell during six of the first eight months of 2016, assuring “a rate of inflation (or possibly deflation) that would again fall below the 20-year historical average of 2.5 percent,” says the Food Price Outlook.
At the moment, grocery prices are 1.9-percent lower than a year ago, says the monthly USDA report. In another comparison, it said the average price level for “food at home,” which accounts for nearly 59 cents of the food dollar, thus far in 2016 is 1 percent below the average price level for all of 2015.
“Food away from home,” such as meals at restaurants and carry-out food, is forecast to rise 3 percent this year, leading to a combined food inflation rate of 1.5 percent, the lowest since 2010. Inflation is forecast to rise to a more normal 2 percent in 2017.
The worst year in modern times for grocery-price inflation was 1974, with a rate of 14.9 percent, according to a USDA database going back four decades. The lowest rates were 0.7 percent in 1992, 0.5 in 2009, 0.3 percent in 2010 and 0.9 percent in 2013.
Low petroleum prices reduce shipping costs and the strong dollar discourages exports of domestic products, such as meat, while lowering the price of imported foods, such as fruits and vegetables — all of which hold down grocery prices.
Beef prices are forecast to average 5-percent lower this year than in 2015, with pork down 2.5 percent and poultry down 1.5 percent. “Retail chicken price inflation has remained relatively low into 2016 partly due to an increase in broiler production,” says the USDA. Meat, poultry and seafood account for more than 12 cents of consumer spending on food.
Egg prices soared nearly 18 percent in 2015 because of shortages created by the bird flu epidemic; they are forecast to plunge 18.5 percent this year as flocks are rebuilt.
For grocery chains, a period of flat or falling grocery prices “breeds more competition because you’re trying to win traffic and you’re being more promotional doing that,” Wells Fargo analyst Zachary Fadem told CNBC earlier this month. Profit margins suffer when chains fight for market share. When food inflation slowed to a trickle in 2009 and 2010, the price war among grocery chains “carried on for three to four quarters before abating,” said Credit Suisse analyst Edward Kelly.