Costs for ingredients like rice, wheat and oil are falling, so why are prices for breakfast cereals like Rice Krispies and Special K still rising?

If you want an answer to this question, you aren’t the only one.

Food companies like Kellogg Co, which makes the products mentioned above, say the higher prices are justified because while commodity price inflation has eased amid a global economic downturn, commodity prices remain well above historical averages.

But CEOs of grocery chains like Safeway and Kroger say those higher prices are increasingly out of whack with their own lower-priced private label products.

“We have seen some price declines,” Kroger Chief Executive David Dillon said on a conference call, but he said prices for national brands were not in step with a broader fall in commodity costs.

Dillon said sales of national brands were ho-hum, while sales of Kroger’s store brands are rising enough to hit historic highs.

“That’s going to continue as long as that kind of price differential exists,” said Dillon, who expects national brand sellers to discount via promotions before they cut prices.

Dillon said there is no tug-of-war between grocers and food makers over pricing, but then again, he thinks his company will benefit either way. If national brands keep prices high, consumers buy more store-brand products, which produce higher profits. If national brands lower their prices, the grocer’s overall sales could rise because it would be selling more expensive products.

“We are quite happy in either scenario,” Dillon said.

While store brands result in lower total sales, grocers love them because they generate more profit. At the same time, they are favored by shoppers because they help them lower food costs during a severe recession.

Indeed, private label has become so popular that Safeway is rolling out its own line of seafood and prepared entrees called Waterfront Bistro.

(Picture: Reuters)