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Economy, Lower Commodity Prices Slowing Food Cost Growth

After a couple years of above average food price inflation, a Purdue University economist believes the inflation rate will return to normal next year.

Corinne Alexander, an agricultural economist, estimated 2010 food prices would increase between 2.5 percent and 3.5 percent, not near the records that were set in 2008 of 5.5 percent. The 10-year average for food-price inflation for 1997 to 2006 is about 2.5 percent, she said.

"One reason we're not seeing prices go up so much right now is we had a massive recession that caused people to cut back," Alexander said.

Alexander said that in July of this year, the cost of food purchased for the home decreased 0.9 percent over the same month last year, much lower than usual and lower than the September 2008 peak of 7.6 percent.

Food purchased away from home, such as in restaurants, increased 3.2 percent this past July over the same month last year. That was about average, and lower than the December 2008 high of 5 percent.

Several factors have been driving the decline in those inflationary numbers. Alexander said significantly lower commodity prices, as well as the lower cost of fuel, have been major contributors.

"Grain prices peaked last summer. We had $8 corn. We had $13 wheat," Alexander said. "We also had $147 per barrel oil."

The recession also slowed growth in developing countries, reducing the demand for meat and other food exports. That has increased the supply available in the United States, driving down the price.

"You just can't have rising meat prices with domestic supplies so high," Alexander said. "This year domestic demand weakened because of the recession."

Alexander warned, however, that inflation could go higher based on the economy.

"If the U.S. and world economies start growing and the recession is finished sooner than expected, that will boost inflation," she said.

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