The CPI for Breakfast: How Does it Taste?

By Brad Zigler

Friday morning's Consumer Price Index release brought no joy to breakfast tables in America. CPI rose at an unexpectedly high 0.8% clip in May according to the U.S. Bureau of Labor Statistics. Pundits, analysts and Manny the Bookie were laying odds on a 0.5% uptick in inflation after last month's 0.2% increase. The May surge translates to a 4.2% annual inflation rate.

Once again, food and energy costs were singled out as inflationary miscreants. Over the 12-month period ending in May, consumers' food costs rose 5.1%, while energy prices bolted up 17.4%. Figures indicate that the pace of inflation is accelerating at the consumer level, too. Annualizing the most recent three-month price trend, food prices are rising at a 6.2% rate, while costs are shooting up 28.2%. That ought to make you think twice about cooking your food, huh?

Core inflation - that government convenience that carves out food and energy costs - ticked up 0.2% in May, in line with expectations. Take out food and energy costs (like you could actually do that) and inflation seems to be poking along at a rather benign 2.3% annual rate.

Now here's the interesting bit: CPI figures are released ahead of PPI - the Producer Price Index - a benchmark for wholesale prices. (You can expect the Bureau of Labor Statistics to put out the May PPI figures on Tuesday, June 17).

Recent PPI figures show the spread between crude and finished food prices has been narrowing dramatically over the past year. Farm products have risen 29.7% since the beginning of last year, while finished consumer foods have ticked up only 8.9% at the wholesale level. That means there's still a lot of inflation backed up in the distribution channel.

Producer Price Indexes For Food (Jan-07 Through Apr-08)

The good news is that the trajectory of some wholesale food prices has actually decelerated. In fact, our Breakfast Index has declined for the second consecutive month. The Breakfast Index takes the measure of futures on eight of the most commonly used breakfast food components. The Index fell in May at an annualized 18.1% rate, following April's 5.5% decline.

Three-quarters of our breakfast-table commodities, in fact, cheapened over the past three months, most notably sugar, which dropped at a 64.9% annualized rate. Good thing, too. Consumers will need the extra energy boost from the sweet stuff so they can lug home the multi-gallon jugs of milk from Costco (NASDAQ: COST) or Wal-Mart (NYSE: WMT) to save a few more kopeks. Milk prices jumped at an annualized rate of 59.8% over the past quarter.

Of course, for bleary-eyed folks like me, the most encouraging statistic of all was the decline in coffee prices (see below). Makes me wonder if I'll be 39.4% perkier a year from now.

Stay tuned to find out.

Breakfast Index (May-08)