Higher grocery prices are driving U.S. consumers to restaurants. (Photo Credit: CC BY-SA/Ian Muttoo/Flickr)

While it may seem counter-intuitive at first glance, U.S. Department of Labor figures suggest that inflation has actually made eating out a more attractive economic option. According to The Telegraph, increased prices for fruits and vegetables have helped drive the overall level of consumer prices to the steepest increase seen since June 2009.

Indexes favor the restaurant chains

The Department of Labor uses twin indexes that measure the price of food away from home and at home. In February, food prices were up 0.2 percent away from home. Over the past year, prices away from home have risen 1.6 percent. By contrast, food prices at home were up 0.8 percent last month and 2.8 percent over the last 12 months. The increase in price for fruit, vegetables and meat have been largely to blame.

Economists explain the difference between the indexes by comparing the influence of consumers versus restaurant chains. While the consumer is “just a price taker” without bargaining power at the register, according to economist Brian Bethune of IHS Global Insight, restaurant chains have the ability to bargain with food producers and suppliers.

Recovery interrupted

While North America is beginning to see signs of economic recovery, the increase in food prices will hit Americans hard. The Federal Reserve has not seen enough positive momentum to back down from its most recent bouts of quantitative easing. It also has not been convinced that now is the time to begin raising interest rates. However, it is not believed that that the rises in food and energy costs are signs of a larger inflationary threat, as core inflation was only up 0.2 percent last month.

Fear of Japan-style deflation

In January, the Federal Reserve predicted that the U.S. would experience a level of deflation like Japan had recently experienced. With consumers leveraged to the hilt in non-liquid investments and a negative savings rate in place, a drop in prices can be catastrophically bad. Lower corporate profits would lead to layoffs. The U.S. labor market has proven to be more resilient. The number of unemployment benefit filings dropped by 16,000 last week, which makes the most recent four-week average 386,250 – the lowest since July 2008.

Get used to the ‘new normal’

The International Monetary Fund did not have good news regarding the increase in food prices. From a new IMF article:

“Policymakers — particularly in emerging and developing economies — will likely have to continue confronting the challenges posed by food prices that are both higher and more volatile.”

Sources

Elliott Wave International: http://www.elliottwave.com/why-is-deflation-bad.aspx
International Monetary Fund: http://www.imf.org/external/pubs/ft/fandd/2011/03/helbling.htm
The Telegraph: http://www.telegraph.co.uk/finance/economics/8388928/US-inflation-puts-eating-out-back-on-the-menu.html
Wall Street Journal: http://blogs.wsj.com/economics/2011/03/17/higher-food-prices-likely-here-to-stay/

Glenn Beck on the cost of food

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