14 Mar 2013

Food prices expected to lift driven by NZ and US droughts

7:12 am on 14 March 2013

Food prices are expected to lift in the next year, driven by droughts in both New Zealand and the United States affecting supplies.

Official figures show the food price index fell 0.3% in February, compared with the previous month.

The decline was mainly driven by seasonally lower prices for fruit and vegetables and meat prices, with more stock sent to slaughter early due to the drought.

Lower dairy prices helped keep the cost of groceries down, while restaurant and takeaway prices also remain subdued.

On an annual basis, prices fell 0.1%, but ASB chief economist Nick Tuffley says there will be a mixed influence of lower meat against higher dairy prices.

He says there's likely to be a lift in food prices after a period of decline.

Mr Tuffley says drought in the US will impact on grain and dairy prices.

"Whilst last year we saw declines in dairy prices because of falls we saw in global markets, particularly in the first half of the year, we are likely to see a bit of reverse this year as dairy prices and global markets edge up."

Mr Tuffley says the US and New Zealand droughts will be part of that.

But he says there will be some offsetting impacts on meat prices in the short term as there's likely to be more supply than usual coming onto the market in New Zealand.

Mr Tuffley says food prices are likely to nudge up inflation but not enough to influence the Reserve Bank to change interest rates.

Food prices make up nearly 19% of the consumer price index.