Analyst: Retail deflation could end by May

The longest and deepest trough of retail food deflation in more than 50 years could end by May of next year as effects of a stabilizing U.S. dollar and an associated increase in U.S. food exports flow through the supply chain, an analyst said Wednesday.

Bill Kirk of RBC Capital Markets in a research note Wednesday noted U.S. agricultural food exports have been rebounding (1% in June, 9% in July and 16.5% in August), correlating with the aftereffects of a decline in the strength of the U.S. dollar, which was up by double-digits from late 2014 through 2015. The high value of the dollar affected retail prices by making food from the U.S. appear more expensive to foreign buyers, thus creating a domestic oversupply, Kirk argued.

"We believe the rebound in exports is the beginning of the end of the deflationary cycle," Kirk wrote.

As previously reported, the U.S. consumer price index for food at home has been down on a year-over-year basis for 10 months, marking what Kirk called the longest sustained period of U.S. food price deflation since at least 1959. Under pressure to sell more product, retailers have reacted by aggressively promoting, leading to additional strain on earnings.

Noting that exports historically have a 5-month lag to producer prices, and shelf prices tend to lag producer increases by a similar gap, Kirk forecast producer prices would turn inflationary again in January followed by the consumer price index in May. U.S. retailers reacting to falling input costs by aggressively promoting deflating items like beef has been a positive inasmuch as it has lifted sales volumes by about 10% and that is helping to address the oversupply, Kirk added.

He said he was also encouraged by anticipation of China lifting a ban on imported U.S. meat that went into effect in 2003. That ban could be lifted by year-end, according to recent reports.