Food prices in Australia continue to rise

by Editor
Friday, January 30, 2009

Food price inflation remained vigorous and broad-based through the closing months of 2008, despite a decline in overall inflation, according to the latest quarterly Australian Bureau of Statistics Consumer Price Index (CPI) data.

Australia’s latest official inflation figures showed that while the overall CPI fell 0.3% quarter on quarter (QOQ) – the largest quarterly fall in more than 11 years – food prices rose 2%, bringing the annual increase in food prices to 5.6%.

Price increases were registered across all key food categories and across all levels of processed food (milk, snack foods and takeaway meals).

Tim Hunt, senior analyst at food and agribusiness banking specialist Rabobank, said food prices had continued to be impacted by the “tail-end ripple effects” of last year’s commodity boom. What we were seeing in part are the last ripple effects of the extraordinary commodity price boom of 2007-08,” he said. Global shortages of key food crops drove the cost of commodity food ingredients through the roof during this period, and record oil prices drove up the cost of fuel, energy, and packaging. Inevitably the consumer has had to wear some of that cost increase, Hunt explained.

While the cost of agricultural and oil-derived products fell sharply in the second half of 2008, lags ensured that retail food prices continued to increase through to the end of the year, Mr Hunt said. This observed behaviour reflects at least partly typical lags between ingredient prices and retail prices.

Lags are caused by a range of factors, including delays between spot commodity market price movements and wholesale contract changes, retail contract renegotiation and desire of food processors to restore some margin following a severe squeeze when commodity prices first took off.

More specific factors also influenced price increases in certain food categories in the December quarter. For instance Prices of pork and bacon have been pushed up by a combination of rising costs of imported product (following the slump of the Australian dollar) and sharp reductions in the local pig herd in 2008.

Mr Hunt said it was likely that retail price increases across many food categories would dry up (and in some cases fall) as 2009 progressed, as most of the forces that drove them started to reverse.