Energy price falls in late 2008 and early 2009 helped to offset the impact of a decline in labour incomes on consumer spending power. Energy prices have started to firm again recently but household budgets have enjoyed relief from a new source – a decline in food bills.

A surge in consumer food prices during 2008 squeezed real incomes and contributed to a cut-back in household spending. Food commodity prices, however, weakened sharply late last year and this decline has been feeding through at the retail level recently, with food components of consumer price indices in the US, Japan and Euroland recording an unusual fall over the last six months – see chart.

Food commodity prices recovered during the first half of 2009 but the Economist food price index is currently still 26% below the peak reached in July last year in dollar terms. Despite a headline-grabbing spike in sugar prices, the index has retreated 5% from a recent high in early June. So food CPI trends may remain subdued during the second half.

UK food inflation peaked at a higher level and has been slower to subside, reflecting sterling's big decline during 2008. With the pound recovering recently, however, this effect is reversing and food prices should suppress CPI numbers over coming months (producer prices suggest a favourable impact in the July report released tomorrow – see chart in previous post).