Supermarket Prices Aren't Up as Much as You Think

Every day, Bill Higgins, co-owner of Real Restaurants—a group of 13 San Francisco eateries including the popular Fog City Diner—confronts the reality of food inflation. "Prices have increased, whether it's flour, corn, dairy, meat." While the company has boosted prices by 25 to 50 cents per item, Higgins hasn't passed on all the higher costs to diners. Instead, he's taken cost-cutting actions like reducing workers' hours and keeping the lights off until a few minutes before opening.

Such efforts to insulate consumers from food inflation underscore a larger trend in the United States. The soaring price of commodities—rice has doubled since last summer, and corn is up about 60 percent in the past year—is wreaking havoc in the developing world and imposing burdens on the poor everywhere. But for the typical American, food inflation is more an inconvenience than a dire threat, headlines notwithstanding.

In the poorest corners of the globe, people may spend half their daily income on sustenance. But in this supersized nation, the average consumer devotes only 14.9 percent of expenditures to food and beverages. The typical American spends more on personal-care products than on dairy and bakery products combined, according to the Bureau of Labor Statistics.

While the prices of commodities are rising, most Americans don't buy food by the bushel at the Chicago Board of Trade. They shop at grocery stores, where prices have gone up much more slowly: overall, consumer food prices were up 4.4 percent between March 2007 and March 2008. Yes, bread and milk have spiked (up 14.7 percent and 13.3 percent in the past year, respectively), but fruits and vegetables were up just 1.7 percent in the same time period.

To understand the disconnect between prices in the commodities market and in the supermarket, it helps to consider the many things that happen to a yellow kernel of Iowa corn before it becomes an orange Dorito in a Florida vending machine. Along the way, it's processed, mixed with other ingredients, packaged in plastic and shipped a great distance. "The inflation in commodities is ironed out over time because the price of the raw material is ultimately not that large a percentage of the price you pay in the grocery store," says David Richardson, an economist at the Bureau of Labor Statistics.

At every stage in the journey, there are opportunities for the middlemen—processors, distributors, retailers—to pass along costs, or to absorb them. "In recent months, a lot of the spikes we see on the exchanges are being absorbed by producers," says Lakshman Achuthan, managing director at the Economic Cycle Research Institute in New York. The producer price index, which measures what businesses at various stages of the production process pay, shows that in 2007, prices of raw foodstuffs rose 25.2 percent, but that prices of finished consumer food products rose just 7.4 percent.

When it released quarterly earnings last week, the food giant Kraft reported that the operating earnings of its U.S. cheese and snacks and cereals businesses fell more than 22 percent. The reason: a competitive market prevented Kraft from passing along the sharply higher costs of raw materials, "including an approximately 30 percent increase in dairy costs."

The imported fromages on the shelves of Mirabelle Cheese Shop in Westport, Conn., have little in common with Kraft Singles. But with prices of imported cheese up 40 percent in the past year, owner Dale Saffir is similarly shrinking from passing on her high costs. She points to a Papillon Roquefort, priced at $28.85 a pound, up from $26.50 a year ago. "Given recent price increases, it should be $32.50, but I'm not taking my usual markup," she says. "I can't do that to my customers."

Businesses like Kraft and Mirabelle are effectively functioning as inflation shock absorbers. But economists say their efforts still aren't fully insulating customers from the jolts the commodity markets are delivering. That's because the classes of products that are rising the most—milk, eggs, bread—have a special status. "These are frequent purchases, and you have no choice about them," says Achuthan. "So these price increases have a larger psychological impact on consumers than other types of inflation."

In addition, the prices of milk and eggs, along with gas, are heavily advertised and prominently displayed, unlike, say, the prices of appliances or manicures. They're part of the national conversation. In the 1992 presidential campaign, a defining moment came when President George H.W. Bush reinforced his image as an aloof patrician by failing to accurately gauge the price of consumer staples like a gallon of milk. Candidate Bill Clinton, in full feel-your-pain mode, aced the question.

Even though they're not catastrophically high, the prices of staples are still giving politicians food for thought.