Food Inflation Set to Pick Up as Energy Costs Filter Through

what happened

According to Barron's, US grocery prices have been unusually stable recently, but economists expect food inflation to pick up over the next year. The food CPI was flat in September after rising 0.1% in both July and August. Over the past 12 months, food prices rose 2.5%, below the 3.7% headline rate in September.

Higher energy costs, especially diesel, are passing into transport and packaging expenses, while El Niño threatens crops in the western US, Mexico and South America. Ricky Volpe, a professor of agribusiness at California Polytechnic State University, expects US food inflation of 3.5% to 4% next year. Brent futures touched $110 a barrel this week, and WTI reached $101.

The producer price index rose 1.3% in September, its quickest monthly gain in over four years, and wholesale food costs climbed 1.2% month over month. Joe Brusuelas, chief economist at RSM US LLP, said this would thin producer margins and push costs onto households.

why it matters

For markets, the link between oil and food matters: higher energy prices quickly feed into grocery costs and could prompt the Fed to raise rates further if inflation becomes broad-based. Lower- and middle-income households would feel the squeeze most.

market impact

Oil and grocery stocks: higher energy and transport costs pressure inflation expectations and producer margins

tags

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