After sharp rise, food prices fall

Grocery shoppers are finally seeing some reprieve from last year's steep price increases.

Prices on some key items - dairy products, meats, fruits, vegetables, and breads - are dropping as stores slash prices to better compete and food-makers do more promotions and pass along savings from lower ingredient and gasoline costs.

A price index of food sold to be eaten at home fell for the seventh time in eight months in July. The index, which is part of the government's Consumer Price Index, fell 0.5 percent in the most recent month and is down 0.9 percent in the last 12 months.

In fact, overall food prices - what is sold in groceries and restaurants - haven't risen on a monthly basis since November.

That doesn't erase the surge in food prices last year, when costs for ingredients such as wheat and corn and fuel costs for transportation soared to record highs. Food-makers raised their prices and some shrank package sizes to protect their profits. The government's food-at-home index finished last year up 6.7 percent.

But ingredient costs for major food-makers, including H.J. Heinz Co., Kraft Foods Inc., and Hormel Foods Corp., were down about 28 percent on average as of Sept. 1, from the same time last year, according to Jonathan Feeney, food analyst for Janney Montgomery Scott.

That means the food industry now has room to give back some of those price increases - and feed the frugal consumer who is using more coupons, buying more store brands, and switching to discounters to stretch a budget.

Consumers' demand to save money is pressuring retailers and manufacturers to cut everyday prices and boost promotions throughout their stores.

"The consumer really is very much in charge of the effort," said Herb Walter, a partner with the accounting firm PricewaterhouseCoopers. "They're picking the price points they want and when they want it."

Safeway Inc. recently announced lower prices on milk, eggs, cheese, and other basic items. Whole Foods Market Inc. says low prices on produce, such as organic berries, has meant significant savings for shoppers.

And Costco Wholesale Corp., which aims to be the first of its peers to lower prices and last to raise them, says prices are down on items from paper towels to prime-cut meat.

Costco's chief financial officer, Richard Galanti, said the company made some drastic moves in pricing, including reducing the price of its rotisserie chicken by $1. The company sells just under one million of these chickens a week, so the cut hurt profit margins.

But Costco determined it would be worth it in the long run, and shoppers gobbled up the deal. The company said it helped solidify its position as a value-focused company, which is so important to consumers.

"I think across the board, people are spending less and spending more consciously," Galanti said.