Q: What does that mean for food prices?
A: Prices are starting to fall. In the first three months of 2009, food prices fell at an 0.8 percent annual rate, according to the CPI.
Q: But my grocery bill isn't shrinking drastically. Why not?
A: While food ingredients cost less, food companies say they're still not as low as they've been in previous years. In fact, ingredient costs are still expected to be up this year for many major food makers like Kraft Foods Inc. and General Mills Inc.
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Also, it's unclear how long commodity prices will stay down. Oil prices have been rising to around $60 a barrel since they fell below $35 in February, and higher fuel prices can mean more expensive commodities. Experts say food companies don't want to drop prices just to have to raise them again — that can disrupt business and confuse customers, or even turn them off entirely.
Q: Falling food prices are good news for consumers, right?
A: While lower food prices may help consumers as they try to stretch their budgets, there's a steeper cost to the economy: the risk of deflation.
Price cuts mean less money is being spent, which means companies make less money and, in turn, spend less money. When price declines become widespread and prolonged, you can enter a period of deflation. Economists worry about this because falling prices can hurt the value and prosperity of businesses, which can lead to wage cuts and layoffs.
The last bout of serious deflation in the U.S. happened in the 1930s — during the Great Depression. Fears about deflation have lessened as a result of interest rate cuts and other moves by the Federal Reserve to encourage spending and investment. Federal Reserve Chairman Ben Bernanke said earlier this week that the risk of deflation is "receding" but it shouldn't "be ignored."
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