Filling Up on Food-Price Inflation
Beware inflated expectations. Investors are beginning to bet that a return of food-price inflation will boost grocery-store profits. Retailers can sometimes keep their percentage markups constant when input costs rise.</br></br>The cost of food for home consumption does indeed look set for a rebound. After falling 2.4% last year, according to the Bureau of Labor Statistics, retailers are beginning to predict that it will resume its upward march. This week, Wal-Mart Stores said it expects food deflation to abate this year and Winn-Dixie forecast outright inflation in the second quarter. Friday's consumer-price index data for January could add to the evidence.</br></br>This year could be more complicated than usual. First, the initial round of food inflation is likely to occur in perishables such as milk, whose price has already rebounded in recent months. Just as some grocers saw perishables volumes rise last year when prices fell, the reverse could be true if prices rise.</br></br>Second, packaged-food prices could keep falling for some time. Even if raw ingredient costs begin to rise, many manufacturers have locked in lower raw-material prices using hedges. Meredith Adler of Barclays Capital estimates packaged food accounts for 40% of the average grocer's revenue.</br></br>Finally, moves by the likes of Costco and Wal-Mart to sell more private-label products could damp food-price inflation.