Grocery aisle relief as prices fall

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

Food prices are dropping on some key items as retailers slash prices to better compete and food makers do more promotions and pass along savings from lower ingredient and gasoline costs.

It's welcome relief for American consumers who are looking to save money as they cope with stagnant incomes, job loss and economic uncertainty.

Prices for dairy, meat, fruits, vegetables and bread have all fallen.

A Labor Department 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 Consumer Price Index, fell 0.5 percent in the most recent month and is down 0.9 percent in the past

12 months.

In fact, overall food prices - what's sold in groceries and in restaurants - haven't risen on a monthly basis since November 2008.

Still, that doesn't make up for the surge in food prices from last year, when costs for ingredients like wheat and corn and fuel costs for transportation soared to record highs. Food makers raised their prices and some even shrank package sizes to protect their profits. CPI's food-at-home index finished last year up 6.7 percent, so the less than 1 percent drop so far this year doesn't erase that.

But ingredient costs for major food makers, including Heinz, Kraft and Hormel, are 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 hikes - 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 Pricewater-

houseCoopers. "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 Gallanti said the company made some drastic moves in pricing, including reducing the price of its rotisserie chicken by $1. The company sells just under 1 million of these chickens a week, so it hurt 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.

The factors that drive what consumers actually pay can vary wildly.

Weather, demand, oil prices and market competition all play a role. And each food category has its own economics of supply and demand. Falling prices for gasoline and transportation plus consumer resistance to price increases have helped drive this latest spiral downward.

April Schreiner, a mother of two, said she has noticed a difference in her grocery bill.

During a visit to a Portland, Ore., Fred Meyer store she paid 88 cents for a half-gallon of milk, which she rarely sees for less than $1. Butter and other staples also were unusually low-priced, she said.

"Everything spiked for awhile with gas prices, it hurt to go to the store," she said. "Now there is some relief. I see it. My budget sees it."