Expect higher food prices to take a bite out of your budget

Food prices, after a year and a half of stability, are starting to climb again, the result of rising ingredient and commodity costs. Some analysts say prices could go up an average 4 percent in 2011.

It might be your Lucky Charms, or maybe your Cheerios — General Mills won't say which — but prepare for a price hike on some of your favorite Big G cereals next week.

Meanwhile Kraft Foods, the nation's largest packaged-food maker, has announced or implemented price hikes on about 40 percent of its North American product line.

And have you seen the price of bacon lately? It was 16 percent more expensive in September than a year earlier, according to federal data.

Most analysts aren't expecting a return to the 5.5 percent food inflation rate of 2008. But some say the increases could be a sharp departure from the 1.8 percent rate of 2009 and the even tamer increase expected for all of 2010.

"I think over the past year or so we've developed a pretty big bubble in the food system,"said Bill Lapp, an economist at Omaha-based Advanced Economic Solutions, which specializes in food and commodities.

Commodity costs have been building, particularly over the summer. But until recently, food makers have been reluctant to pass down those expenses, Lapp said.

"It's a very competitive environment for grocery stores and restaurants, and it's been difficult to pass down costs," he said. But the breaking point appears to be here.

General Mills recently said it would increase prices by "low single digits"on 25 percent of its cereal portfolio Monday, the first such price increase in 3 ½ years. The maker of Gold Medal and Pillsbury flour and Betty Crocker and Bisquick baking mixes has said some of those products would see price increases in the mid-single digits in early January.

Analysts expect Kellogg to raise cereal prices, too. Global packaged-foods giants Unilever and Nestlé have recently signaled higher prices on the horizon. And fast-food behemoth McDonald's said last month it planned to raise prices to offset rising costs.

The biggest impact won't hit until 2011. Indeed, a food inflation rate of only 1 percent to 1.5 percent is expected for all of 2010, said Ephraim Leibtag, an economist for the U.S. Department of Agriculture (USDA). That would be the lowest annual food inflation rate since 1992.

For next year, though, Leibtag sees the rate rising to 2 percent to 3 percent, in line with recent historical averages. Other analysts are less conservative.

"The USDA doesn't like to break bad news,"said Michael Swanson, an agricultural economist at Wells Fargo. Swanson projects at least 4 percent food inflation next year. Lapp, of Advanced Economics, anticipates at least 3 percent.

Surging food-production ingredient costs are spurring the increases. U.S. sugar prices are at highs not seen in at least two decades. Commodity prices for coffee are at a 13-year high. And wheat prices hit a two-year high in August.

The USDA's monthly crop forecast out Tuesday cut the U.S. soybean crop by 1 percent, more than analysts expected, so shrinking supply is clashing with growing worldwide demand. Corn prices are near 26-month highs, and corn futures for December delivery — a key price gauge — are up about 45 percent since July. "Nobody was expecting this kind of run on corn," Swanson said.

Even before corn's run-up, pork and beef prices were already rising at a heady clip.

Cattle and hog producers, after a couple of terrible years, began thinning their herds last year, tightening supply. That factor, along with strong export demand, brightened their business outlook for 2010 but put pressure on prices at the meat counter.

Pork prices are expected to rise at least 4.5 percent this year, the highest increase in any primary food category, according to government data analyzed by Janney Capital Markets. Beef and veal were second, with 2.5 to 3.5 percent increases expected for 2010.