Sharp rise in food prices likely again next year

DALLAS — DALLAS -- For cash-strapped consumers already beset by higher gasoline prices and escalating mortgage rates, the hits just keep on coming. This time, it's food.

The sharp rise in food prices in 2007 is expected to be followed by another higher-than-normal increase next year, the U.S. Department of Agriculture said Dec. 17. And next year's punch will be to the breadbasket.


Items made with wheat (breads and crackers) and soybean oil (cooking oil and fried foods) are expected to rise so much next year that they'll boost the cost of cooking at home as much as 4.5 percent - half a percentage point more than predicted just a month ago.

So pinched consumers thinking they can cut back by eating at home more will find little relief there. Home cooking remains less expensive than eating out, but the gap is closing.


4% gain expected

This year is expected to go on record as having one of the largest increases in food prices since 1990 - an increase of 4 percent, according to economists at the USDA.

And 2008 will bring an additional rise of at least 3 percent, according to the USDA forecast. Both rates are substantially higher than the 2.4 percent gain in 2005 and a similar rise in 2006. Prices rose 1.8 percent in 2002.

Meanwhile, the Energy Information Administration forecasts a 17.7 percent increase in crude oil prices next year, with a corresponding 10.7 percent boost in the price of a gallon of regular gasoline.

So just driving to the grocery store will cost more.

While consumers watch grocery and gas costs increase, economists chart the rise of the pain inducers.

Ephraim Leibtag, an economist with the Economic Research Service of the USDA, spent a recent morning bumping up estimates for 2008 price increases for grocery items such as fats, cooking oils, cereals and bakery products.

The growth rate escalated beyond estimates made just a month ago after the USDA looked at November's consumer prices. Not everything is getting more expensive. The price of eggs, for example, is expected to drop at least 2 percent next year after rising 28 percent in 2007.


But elsewhere, 2008 will be a worse year than most. With an anticipated gain of 5.5 percent to 6.5 percent, cereals and baked goods are expected to see the biggest increase of any single food category, according to the Economic Research Service estimate.

The 2008 price increase for the category comes on top of the 4.3 percent rise expected this year.

Leibtag said wheat costs have gone up as supplies have gone down, due in large part to a drought in Australia, a major supplier of America's wheat. (The Australian drought was earlier blamed for this year's expected 7.4 percent rise in dairy prices.)

Sara Lee Corp. has raised prices three times, for a total of 15 percent, since December 2006. The most recent increase, 5 percent, was announced last week but may not show up on grocery goods until next year, said Mark Goldman, spokesman for the company, based in Downers Grove, Ill.

"We're talking about prices [for wheat products] that are double, in some cases triple a year and a half ago," Goldman said. Inflation is hitting the whole-grain breads health-conscious consumers have been favoring.

The price for oils, especially soybean oil, is expected to climb 5 percent to 6 percent as soybean farmers switch to corn.


Corn farmers are reaping higher prices as more corn is diverted from animal feed to fuel.

Gas prices

But the ethanol infusion is not enough to keep gas prices from rising.

The Energy Department's Energy Information Administration is looking for the benchmark West Texas Intermediate crude oil to average $84.83 a barrel in 2008, up from the $72.05 this year and 50 percent above the 2005 level.

Crude counts for an increasing share of the price of a gallon of gasoline. It translated to 59 percent of the cost of a gallon of regular gas in 2005, when the average price per gallon was $2.27.

In 2008, a gallon of regular gas is expected to average $3.11, with the cost of crude making up 65 percent of the cost, according to Energy Department figures.


The balance of the cost of gasoline is tied to such factors as refining and taxes.

While consumers can't go out and drill for oil, Rayola Dougher, a senior economist with the American Petroleum Institute, notes that measures such as keeping tires properly inflated, not carrying extra weight and slowing down can save fuel.

"If you stack these things up, it can make a difference at the pump," she said.

And those changes won't affect your life as much as cutting out food.