WASHINGTON (FNS) -- Food inflation should be relatively constrained for the remainder of the year despite anticipated higher prices for fruits and vegetables.
Falling meat prices are expected to temper the overall food-price situation, although the changes may not be dramatic enough to please the majority of consumers.
While inflation has become the non-issue of 1998, many economists disagree on what that might mean for the now-healthy economy and now-steady interest rates. It's been more than seven years since the economy began its last expansion and more than a year since the Federal Reserve raised its benchmark federal funds rate, which sets the interest that banks charge each other for overnight loans. The rate now rests at 5.5%.
For analysts and the Fed, attention is now focused on the labor market and its recent wage increases. Unemployment is now at a 24-year low, resting at only 4.6%, while the Commerce Department reported last month that personal income jumped 0.6% in January -- the biggest gain since June -- and by 4.5% during the fourth quarter. Likewise, personal consumption grew by 0.4% in January and by 2.5% in the fourth quarter.
Typically, such wage and employment pressures would have the Fed rushing to raise interest rates as a way to slow the overheating economy. But while continuing to grow at its fastest annual rate in 10 years -- close to 4% -- the current economy has not produced the expected inflation. Indeed, in some categories, including certain food areas, prices have fallen.
Take meat and dairy products. In February, prices for meats dropped 0.8% against January, while dairy prices dropped 0.5%.
Don't bother trying to tell consumers that, however. According to Mona Doyle, president of the Consumer Network in Philadelphia, the general consensus among shoppers is that prices are rising and product sizes are shrinking. The general shopper impression, she said, "is one of irritability from hearing there's no inflation after going to the supermarket."
Doyle said most shoppers say they feel the strongest pinch in the coffee aisle as well as among health and beauty aids. "A greater number of consumers think they've been hit and that prices are high," she said.
In reality, supermarket prices only recently began rising -- modestly in March and April -- wrote Donald Ratajczak, director of the Economic Forecasting Center at Georgia State University, in his latest report on the Consumer Price Index, which measures inflation.
Going forward, he wrote, "grocery store prices should be constrained by declining meat prices this year. A build-up of cattle herds will end the price declines next year, however. Price gains for fruits and vegetables could be larger this year than projected if the freeze in the South proves to be more damaging than currently estimated."
Ratajczak predicted that for the remainder of the year prices for fruits and vegetables will see the greatest gains, at 2.9%, followed by cereals at 2.1%. Dairy prices are expected to grow by 1.3% while, conversely, meat prices could fall by as much as 0.5%.
"On balance, food inflation should remain less than overall price changes for the CPI in the next two years," Ratajczak wrote.
According to the Labor Department, overall growth in the core inflation rate -- CPI minus food and energy -- has been slipping in recent years: In 1997, the core rate held at 2.2%, while in 1996 the core rate rose 2.6% and in 1995 the core rate rose 3%.
At the Federal Reserve, it's that trend, combined with gains in productivity -- as measured by output per hour -- that has kept the board of governors from raising rates. According to government statistics, the productivity rate grew by nearly 2% in both 1996 and 1997, compared with about 1% during the previous two decades.
While many analysts doubt whether that pace can continue for much longer, Fed chairman Alan Greenspan said in his semi-annual state of the economy address to Congress that for now the current combination has created low inflation "as closely approaching price stability as we have known in the United States in three decades."
A key question now, said Greenspan, is how the ongoing turmoil caused by currency devaluations in Southeast Asia will affect the U.S. economy.
Greenspan said that, without much to go on yet, the Fed forecast for 1998 is "more tentative than usual." He said the Fed expects the economy to grow by between 2% and 2.75% during the year. And while unemployment should stay low, inflation is still expected to grow by only 1.75% to 2.25% during the year, near to 1997's low rate of 1.7%.
"This outlook embodies the expectation that the effects of continuing tightness in labor markets will be largely offset by healthy productivity growth, flat or declining import prices, and little pressure in commodity prices," Greenspan said.
"But the policymakers' forecasts also reflect their determination to hold the line on inflation."
At the EFC, Donald Ratajczak also foresees inflation remaining low, but pegs it as stronger than the Fed forecast. Inflation should gradually increase, he said, from 2.4% in 1997 to 2.6% in 1998 to 3.2% in 1999. Ratajczak also predicts that the current growth in capital investment that has helped increase productivity will slowly diminish and moderate in 1999. Ratajczak added that he agreed with the Fed forecast that the economy will grow by 2.7% in 1998, adding that he predicts a slightly slower, 2.4% pace, for 1999.