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Dairy Inflation

The U.S. is suffering from extreme inflation. Are dairy products contributing to the inflation? If so, what products are contributing to inflation? This post will examine how dairy retail prices have escalated and how that compares to overall U.S. inflation. Most of the data in this post is based on the Consumer Price Index (CPI) and data from the Bureau of Labor Statistics (BLS). It will also review the inflation in the Agricultural Marketing Service (AMS) prices for milk and milk components.

Chart I below shows the annual inflation rate for the Consumer Price Index. The blue line is the increase of overall CPI, and the orange line is the increase of the Food CPI. Annual inflation started growing in 2021 and accelerated to high levels in 2022. Prior to that time, inflation was near to the target rate of two percent annually. The overall CPI hit a high of 9.1 percent in June 2022. The Food CPI climbed higher than the overall CPI reaching 11.4 percent in August 2022. Since then, there have been some declines in the rate of inflation, but the inflation rates are still well above the two percent goal.

U.S. dairy retail product price increases will be compared below to the CPI Food index. The charts below are listed in the order of their increases from largest to smallest. As prices increase, there is often price elasticity of demand, meaning that as the price increases, less will be purchased. Some dairy products like fluid milk are usually considered to have a very small price elasticity of demand as they are a must buy in most households. Other dairy products are more likely to experience lower sales with higher prices.

Butter has seen the largest retail price increases (Chart II). There are multiple reasons for this, but the fact remains that the retail price of butter has escalated tremendously reaching a 33 percent annual increase as of October 2022.

Butter production is still below historical levels and inventories are continuing to decline. Butter sales have been increasing in recent years, but with the high prices there could be a decline in sales. In the case of butter, there are alternative plant-based margarine products that have stood the test of time and are readily available in significant quantities. Price elasticity of demand may come into play with butter. As of October 2022, retail butter prices continue to increase.

Some of the issues that impact wholesale butter prices include production levels and wholesale inventory levels. These variables have been covered in prior posts to this blog:

May 7 - Butter, Butter, Butter

July 5 - Butter Up, Cheese Down

September 11 - Butter Production is a Problem!

November 6 - Are Producers Taking Advantage of High Butterfat Prices?

Fluid milk is the second in terms of the highest inflation increases. The annual increase in fluid milk retail prices reached 20 percent in May 2022, double the CPI food price index in the same month. However, retail price increases for fluid milk are beginning to slow and are at 14 percent year over year in October 2022. This is still way above the two percent guideline. Fluid Milk is a commodity and competition should keep prices in line (more on this below).

Cheese retail price increases are more in line with the Food CPI (Charts IV and V). Cheddar cheese is a very important cheese to follow as the wholesale price of Cheddar is used to represent the overall price of cheese in the Federal Order formulas. Production of Cheddar cheese and inventories of American cheese (primarily cheddar cheese) are at reasonable levels to support normal supply and demand. In 2020 there were issues caused by the "stay at home" COVID polices that switched demand to and from retail groceries and food service. Some of the 2022 annual increases are the result of the low 2021 Cheddar cheese prices.

Retail price increases for processed cheese (Chart V) follow the same pattern as Cheddar cheese. However, current price increases are somewhat greater than for Cheddar cheese.

To answer the question in the introduction, "Are dairy products contributing to the inflation?" Charts II through V above all show retail dairy price increases at or above the Food CPI which is above the overall CPI increases. Yes, dairy products are contributing to inflation.

Are the AMS dairy prices used to price producer milk also showing inflation? The price percent increases in AMS data has risen faster than CPI figures for dairy products. The higher prices paid for raw milk have helped cover the increases in feed and labor costs that are being experienced "on the farm."

Butterfat, the biggest price bubble in dairy, has seen huge price increases in 2021 and 2022. Month by month, the increases over the prior year have reached to record levels, more than doubling butterfat prices from two years earlier. In January 2022, butterfat prices were 92 percent higher than the prior year. The year-to-year increase has slowed down to 42 percent as of October 2022, which is still far above all other inflation numbers in this post.

Fluid milk retail prices have increased by a high of 20 percent in May 2022. During that same month, the base Class I price for milk was up 53 percent. The Federal Order formulas for Class I pricing are linked to butter, cheese, and nonfat dry milk prices, not retail milk prices.

Cheddar and processed cheese retail prices increased by a max of 13 and 16 percent (Charts IV and V). Producer prices for Class III milk for cheese hit a much bigger increase of 48 percent (Chart VIII).

Yes, the producer price for raw milk is increasing significantly.


The retail price of dairy products has increased by more than the food CPI which is higher than the overall CPI. Dairy retail prices are adding to the overall food CPI increases. The rate of retail price increases in dairy products is contributing to the extreme U.S. inflation currently taking place.

Producer revenue percent increases are also well above the retail price increases.

Sunday, December 4, 2022

John Geuss


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