After 2011's Grocery Price Surge, Is Cooking at Home Still a Bargain?

Everybody knows the basic rules for saving money on food. Don't eat out. Ditch the steaks in favor of ground beef. Stick to the staples, like milk and potatoes. But a recent USDA report shows that, in 2011, some traditional money-saving guidelines proved useless as food prices went through the roof.

On average, increasing global demand and rising commodity and fuel costs drive grocery costs up by about 2.9% per year, but in 2011, they rose by an estimated 4.25% to 4.75%. And while prices went up across the board, the cost increase on staples was especially sharp. For example, prices for ground beef -- one of the classic economizing ingredients -- went up by a staggering 10.2%, as did the price of eggs. Meanwhile, turkey, another classic source of cheap protein, went up by 10.5%.

And those were hardly the only groceries whose costs went through the roof. Milk prices rose by almost 10%, and ice cream went up by 10.3%. Apples cost about 9.6% more, and potatoes rose by a shocking 12%. Prices on fats and oils also went crazy, with a huge 11.1% increase.

Some Good Deals

It wasn't all bad news: In terms of proteins, fish and pork are comparatively good options. Seafood, for example, rose a mere 5.9% in 2011, while the price of pork went up by 6.9%. Cereal is only 3.5% to 4% more expensive than it was at the end of 2010, and prices on nonalcoholic beverages -- including sodas -- have only risen by 4.4%.

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One major reason that grocery items -- particularly staples -- went up so sharply in 2011 was because of increasing demand. As Richard Volpe, a research economist with the USDA's Economic Research Service, notes, that high unemployment, low wages, and other economic pressures have pushed many consumers to save money by eating at home. As families have tried to economize by buying cheap ingredients, they have increased demand. Ironically, prices of luxury foods like steaks and fresh fish -- which consumers have been eschewing in favor of cheaper fare -- went up by less.

Restaurants Becoming a Bargain?

For that matter, the cost of eating out -- a classic luxury expense -- rose much only half as much cost of eating in -- between 2% and 2.5%. Part of the reason, Volpe points out, is that restaurant managers "were reticent to pass on price increases to consumers."

This worry isn't surprising: While restaurants and grocery stores are both affected by rising food costs, it is still more expensive to eat out than to eat in, and price hikes can be a deal-breaker for many families. As Mike Lubansky, a senior financial analyst at Sageworks, a financial information company, puts it, "If restaurants pass along all their cost increases to consumers, it will make them less competitive." As a general rule, food costs are supposed to range between 25% and 38% of overall restaurant costs; the rest comes from labor, overhead and other expenses. Lubanski points out that restaurants can "save costs in other areas to make up for increased food costs."

The USDA estimates that the price gap between eating in and eating out will narrow even further in 2012: Grocery prices are predicted to rise by 3% to 4%, while menu prices will likely go up 2% to 3%. Eating at home will still be cheaper than going out, but it's worth asking how long the narrowing trend will continue -- and how many restaurants will survive the sluggish consumer economy.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at@bruce1971.