Food Inflation: What's the Story?

What exactly is food inflation? This term has been tossed around over the last several months, as the price of many food products has risen considerably. By definition, food inflation is exactly what it seems. Consumers are now paying more for inflated food prices. In other words, if your monthly grocery budget was $400 a year ago, you are now likely paying closer to $500-plus, buying exactly the same products.

Food inflation is a definite worry because every segment of the population must eat. While the federal reserve continues to assert that inflation is in check, its measure of inflation simply does not take into account higher food prices. Thus, it is much more important to focus on the individual food prices as a gauge for inflation.

So how did we get here?

If you look back at the price trends of the past couple of years, you will notice that the prices for many food-related commodities have risen substantially. Consider the following prices changes from September 2006 to September 2007:

The above chart clearly shows that the price of food commodities has risen considerably over the past year.  What it does not show, however, is the higher energy and fertilizers costs that also impact the price of food. In short, the food manufactures will pass on the higher costs to the consumer. These costs ultimately translate into the inflated prices that consumers are now seeing at their local grocery store.

Is there are a bright light at the end of this tunnel?

Unfortunately, higher food prices will likely continue for the next decade or so. The main reason prices have headed higher is because of the soaring demand from newly industrializing economies (think Brazil, Russia, India, China, and Thailand, other emerging economies). This trend will continue as the citizens of these nations grow in their wealth and their diets change.

So what do you do?

Protect your purchasing power. Most investors falsely assume that if they have $100,000 in the bank today, it will mean exactly the same thing several years down the line. Unfortunately, as the above change in food prices show...this is not necessarily the case. Your purchasing power must keep pace with the higher cost of food, energy, and day-to-day living expenses. There are several ways that you can prepare for the continual food inflation. Here are a couple:

• 1) Buy Gold. Gold has historically been a hedge against inflation. It has maintained wealth for thousands of years and it will continue to do so for many years to come. As commodity prices have soared over the last several years, the price of gold has also moved up. The price change in commodities would have been covered by the profits in the rise of gold prices.
• 2) If you can't beat them...join them. If food prices are only heading higher, due to the rise in food commodities, why not invest in these markets? Consider investing in various investment vehicles that might profit from rising food prices. There are several agricultural mutual funds and ETFs that can provide you with a long-only approach to these markets.

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