Why Grocery Bills Are Higher

Consumers are shelling out a lot more for milk, eggs and other staples, but getting a break on oranges and ham.

By Ed Maixner, Editor, The Kiplinger Agriculture Letter

March 27, 2008

U.S. grocery prices will climb another 5% or so this year, measured Dec. to Dec., following a 5.6% increase in 2007, the first time they topped 5% since 1990. Typically, prices climb between 2% to 3% a year.

Blame more than just the soaring prices for corn, wheat, soybeans and other field crops that serve as ingredients for both processed foods and livestock feed.

Fuel and shipping costs are tacked onto food bills, too, and transportation costs are up 9% overall in the past year.

Moreover, imported food is getting costlier, in large part because of the weak U.S. dollar. The U.S. imported foods index shows a 13% jump in prices over the past year, boosting prices for coffee, fish, wine, peppers, bananas and other commonly imported products. Imports accounted for about 15% of total U.S. food, by volume, in 2005, and the percentage has inched up since, says Andy Jerardo, an economist with the U.S. Department of Agriculture.

Also contributing to higher grocery prices: Rising debit and credit card fees that stores must pay and then pass on to consumers. Bill Greer, a spokesman for the Food Marketing Institute, says the fees were only 1% of the grocery bill back in the early 1990s, but now average about 2% nationwide, exceeding supermarkets' gross profit margins, estimated at 1.9%.

However, even a 5% overall increase for groceries may seem small, when considering that the price of milk is up 30%; flour, over 25%; eggs, 24%; and margarine, 20%. On the flip side, prices of other foods, including oranges, ham and lettuce are down. Oranges, for example, cost about 35% less than a year ago. And other items such as sugar and sirloin are priced at near year-ago levels.

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