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The Fed's surprising reaction to rising food prices

If you thought your BBQ cost more this past holiday weekend, you're probably right.

Rabobank’s BBQ Index calculated the cost of a 10-person BBQ compared to 2004 and found that it rose 24% to $66.82 from $51.90 in 2004. The survey found that beef, cheese and vegetable prices each have seen double-digits increases since last year. Beef prices are up 71% in five years.

Many factors have conspired to boost prices across several food groups this year. The Wall Street Journal reported that the price of ground beef rose 10.4% in May from a year earlier, helped by a drought in Texas and Oklahoma that's been driving up cattle prices. A virus that affects infant pigs has contributed to a 12.7% rise in pork prices and a disease affecting citrus crops in Florida has contributed to a 17.1% rise in orange prices.

Meanwhile, the Journal reported overall food prices, including nonperishable food items, are predicted to rise just 2.5% to 3.5% this year, according to the USDA. So, while it might seem like there's food inflation at the grocery store, Federal Reserve Chairwoman Janet Yellen has indicated that overall inflation, while it has picked up, remains below the Fed's target rate and therefore interest rates will remain low for the time being in an effort to prevent the economy from overheating.

Why is there a disconnect?

While no one denies the prices of certain food items are rising, Yahoo Finance Senior Columnist Michael Santoli said, “The Fed does not want to, basically, over-extrapolate that into an idea that somehow we have full-blown inflation, either in food or something else.”

Santoli pointed out that consumers can shift their purchases from one food to another. Shoppers have gone from the higher-priced beef to chicken, which has not seen prices rise as much as beef. He also said that higher food prices are essentially a drag on overall consumer spending and the capacity to drive broad inflation, rather than something that produces future inflation.

Santoli said people notice higher food prices and they can be annoying, “but it’s not something that means, therefore, we’re in a big inflationary environment.”

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