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What is so Different About U.S. Food Prices?

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In 2011 food prices hit all-time highs, causing much distress in the developing world as the higher prices led to widespread hunger and social unrest. There was some relief in the months following the February peak, but the March release of the Food Price Index from the Food and Agricultural Organization of the United Nations shows that prices are again on the rise, creating new fears about food price inflation. However, prices are still nominally below their peak about a year ago.

Food Price Index.png

Graph from UN FAO, 2012

While commodity prices were at historical highs in early 2011, U.S. food price increases paled in comparison to global food price increases. In Will U.S. Food Prices Follow Global Trends? found in the 3rd issue of 2011's The Main Street Economist published by The Federal Reserve Bank of Kansas City, Jason Henderson evaluates why the U.S. has been relatively unaffected by these commodity price increases. Henderson explains that consumers in the United States eat more processed and prepared food than the rest of the world so labor markets have a bigger influence on U.S. food prices. He states that only about $0.15 of every retail dollar spent of food in the United States is to pay for farm commodities while labor costs account for about half of every retail dollar spent on food.

Henderson states that since labor costs are the largest contributor to food prices, in the future it is likely that changes in U.S. food prices will follow wages and economic growth more than commodity prices. He speculates that with slow wage growth, the price of food away from home will grow more slowly (2%-3%) than the price of food at home (3%-4%) in 2012. He also states that even if global commodity prices continue to rise, modest wage growth in the U.S. will buffer those effects on U.S. food prices. However, the developing world and even the poor in the United States will feel the effects of higher food prices as the poorest 20% spend about 1/3 of their income on food, and ¾ of their food budget on food at home.



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This page contains a single entry by Sadie Dietrich published on March 20, 2012 2:39 PM.

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