This is WEEKEND EDITION from NPR News. I'm Lynn Neary.

One place where the economy is not hitting as hard as might be expected is the grocery store. Food prices are holding steady - for the moment at least - and that's surprising because the price of grain is on the rise.

We called on NPR senior business editor Marilyn Geewax to explain the disconnect. She joins us in our D.C. studio. Good to have you with us, Marilyn.


NEARY: So, let's begin at the source, Marilyn. Why is grain so expensive?

GEEWAX: It's a simple matter of the short supply and this huge global demand. There's a growing number of middle class families in India and China and they're buying more food. But this year, the global grain supplies are running pretty short. We've had a lot of bad weather. There was flooding in Pakistan and a drought in Russia - it was especially bad there. The drought got so bad that the government banned wheat exports and that helped drive up wheat prices for the rest of the world.

In this country, corn is especially in short supply. U.S. farmers didn't produce enough this year. There were some weather problems, so now they can't satisfy all of the demand. They've got ethanol producers, food companies, livestock growers. So, corn prices surged 17 percent just in October and they've been up pretty sharply all year. So, some analysts are now looking at it, saying it could go even higher and that's partly because of the rising crude oil prices. When oil gets expensive, more people want to make ethanol; and when you make more ethanol, that increases demand for corn.

NEARY: Well, if the price of grain and corn is so high, why isn't that translating into higher prices on our grocery store shelves?

GEEWAX: Well, I know this is going to sound a little strange, but actually relatively little of the price of your groceries is tied to the cost of the food itself. The corn that's in that box of cereal is only worth a few pennies. So, even if the price of corn goes up, you know, 60 percent, that wouldn't translate into a 60 percent price hike at the register. That box has all sorts of costs: packaging, marketing, but the single biggest cost is transportation. You've got to get the corn to the cereal maker and then get it to the grocery store.

So, actually, the price of gasoline matters more than the price of the corn itself. But now we're in a situation where we have rising oil prices and rising corn prices, so together we're really getting these inflationary pressures in the pipeline. So, General Mills, for example, just announced that it's going to raise the wholesale prices on some of its cereals in mid-November. The company said that those price hikes will just be in the low single digits, but still it's a price hike.

NEARY: So, we can expect to see things like cereal, for example, as you were talking about, those prices might be going up.

GEEWAX: Yes, that's right.

NEARY: OK. What about meat and dairy products, because, obviously, livestock need a lot of grain. Doesn't that then contribute to the cost of food as well?

GEEWAX: Right, it does. So far, we really haven't seen it. The consumer price index for this year so far shows that food prices are up only 1.4 percent, and that's the lowest annual food inflation rate we've had in almost two decades. But the point you're making about the livestock is true. They eat a lot of grain and that starts to increase the costs, if you're raising livestock and you're paying more for your feed, you're going to want to raise your prices. So, that's putting inflation into the system.

So, the projection right now for food inflation for next year is about three percent, which would be twice this year's annual rate. Now, compared with the inflation we had back in the 1970s, three percent doesn't sound like a lot, but people are really squeezed these days. Social Security payments haven't gone up at all this year, most workers have gotten only really meager raises, and of course, we have millions of out of work Americans who don't have any paychecks.

So, even if there's only relatively small inflation coming, it would be very unwelcome at the grocery store.

NEARY: So, the message is take advantage of those stable prices we're experiencing right now for as long as we can.

GEEWAX: That's right, Lynn. Eat up.

(Soundbite of laughter)

NEARY: NPR senior business editor Marilyn Geewax. Thanks for being with us, Marilyn.

GEEWAX: You're welcome, Lynn.

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