Consumer prices rose, but your grocery bill fell in 2009

The food portion of the consumer price index declined for the first time since 1961. Dairy prices plunged the most since the Depression.

After a long slumber in 2008, inflation blinked open its eyes last year in the United States, rising 2.7 percent in December from the same period a year ago, the US Department of Labor reported Friday.

While that rise in 2009 was far more than the 0.1 percent increase the previous year, it was mostly due to a rebound in energy prices and was not out of line with long-term averages. What really stands out about 2009 is a historic fall in food prices.

Last year, for the first time since 1961, the food index fell – 0.5 percent. While the cost of dining out rose 1.9 percent, it was more than offset by a decline in the cost of food at home. Prices for all six major grocery groups fell in 2009, with dairy and related products posting a 7.6 percent decline. That's the largest annual decline since the Depression year of 1938, the Labor Department reported.

While a boon for consumers, the price plunge reflects the huge challenge now facing dairy farmers.

Food costs as well as energy prices often move swiftly up and down, which is why economists exclude them when looking at so-called core inflation. For 2009, the core inflation rate rose 1.8 percent, the same as in 2008.

That muted increase suggests that inflation won't come roaring back anytime soon.

In December, "there were one or two isolated signs of higher prices: clothing prices increased by 0.4 percent, reversing a drop the months before, and used car prices increased by 2.5 percent," wrote Paul Ashworth, a senior economist with Capital Economics Ltd., in an analysis. "But these won't last. In general, core inflation is slowing. We expect it to slow further this year, possibly to only 1.0 percent by the end of 2010."