When the Department of Commerce announced a rise in the cost of consumer goods last month, speculation of a pending interest rate hike had market watchers jittery. Should they be? A University of Georgia economist says probably not.
"For the past several years, food prices have been going in stride with the inflation rate," said Bill Thomas, an economist with the UGA College of Agricultural and Environmental Sciences.
The latest reports show food prices, along with gasoline, tobacco and clothing, rose 0.2 percent in September, capping an increase of 2.2 percent over the past 12 months.
U.S. consumers are actually enjoying the lowest food-price inflation since the early 1990s with food-at-home prices through the first eight months of 1999 averaging only 2 percent higher than 1998.
Prices are forecast to rise only 2 percent to 2.5 percent in 2000. Low food prices are, in part, the result of a low general inflation rate and large supplies of meats.
"You have some offsetting situations," Thomas said. "This year we had record low pork prices, but fresh fruit prices were up almost 8 percent. The prices change with supply and demand, but have closely matched the price of inflation."
As farmers await the harvest to see how this year's drought will affect their yields, economists are wondering what low yields will do to food prices and their effect on the economy.
"Even though some areas have lost some grain to drought, it looks like we will have a nice supply of grain," Thomas said. "The recent hurricanes dumped a lot of rain on Florida, which probably drowned out some vegetable and fruit crops and could raise spot prices."
Holiday cooks worried that the hurricanes washed away their turkeys, fear not.
"Most of our turkeys are frozen and are already in somebody's freezer. So what happened in North Carolina won't affect this year's holiday turkey supply," Thomas said.
"There won't be a shortage or a major price hike this fall," he said. "What will happen in the future depends on how fast the producers recover from the disaster."
Farmers will have windows in the harvest as they replant damaged crops and rebuild livestock and poultry operations. These may cause temporary rises in prices on tomatoes, squash, beans and other commodities produced in the affected areas.
"Pork prices will likely go up," Thomas said. "Grain prices, which have also been low, will go up. But you only have a nickel's worth of wheat in a loaf of bread. So that only means about a penny price hike. The prices in the grocery store don't necessarily reflect what's happening on the farm."
In the short term, food prices don't have a marked effect on the economy. However, the interest rate hike often results from the food and inflation rate going up. And that could happen if food prices and inflation rise faster than expected.
"The Federal Reserve usually raises the interest rate to slow inflation," Thomas said. "They try to slow down the amount of dollars chasing goods. Higher interest rates slow the speed at which people buy things."
(Faith Peppers is the director of public affairs with the University of Georgia College of Agricultural and Environmental Sciences.)