The headline consumer price index (CPI) continues to coast back toward the target inflation range of 2%, but consumers are experiencing stronger inflation in their butter prices heading into the holiday season. So far, they have shown a willingness to pay for it.

Prices have fallen at the wholesale commodity level, lowering fat values and pulling Class IV prices below Class III, but it can take time for those lower spot price signals to reach retail shelves. Heading into 2025, Class IV will likely regain its premium once new cheese plants begin seeking out milk that otherwise might have been bound for Class IV plants.

After climbing more than 10% year-over-year for eight months in 2023, the overall food CPI has hovered slightly above a more palatable 2% for the past several months, as reported by the Bureau of Labor Statistics. But butter has bucked that trend and surpassed the overall food inflation rate, climbing more than 6% year-over-year on average since June and stretching to 7.8% in September.

The higher butter prices facing consumers reflect wholesale commodity butter prices that have climbed steadily since the beginning of the year. After a record-setting peak of $3.50 per pound on the CME spot market last fall, some wondered if 2024 could be the year we see $4-per-pound butter.

But despite churning steadily higher to nearly $3.20, prices fell back to the $2.60 range in September once it became clear that retailers were satisfied with their inventory levels. There’s no need this year for the supply chain’s traditional anxiety over a holiday butter shortage.

International markets, meanwhile, did hit the $4 mark toward the end of September. In other commodities, this might have triggered exports to move into the European market, lifting our own prices along with them. But U.S. butter is typically 80% butterfat while the international standard is 82%. This difference makes opportunistic butter exports a logistical challenge.

The decline in U.S. butter prices will hit Class IV milk prices and milkfat values in the final months of 2024. Nonfat dry milk (the other commodity affecting Class IV prices) has seen some modest strength, but it’s not enough to offset the butter factor. This has led to Class IV falling below Class III for only the third time in the past 35 months.

Futures markets, however, anticipate a return to higher Class IV milk relative to Class III. This could be the result of additional cheese manufacturing plants coming online in the beginning of 2025. They will add more cheese to the market, weighing on Class III, and pull excess milk out of Class IV plants, tightening and supporting markets for Class IV products like butter and powder.

Luckily, American consumers don’t seem deterred by the higher price tags for now. Despite the butter CPI being up an average of 5.6% year-over-year from April to September, domestic butter demand was up nearly 8% from April to August. This is a good sign for what consumers will do in 2025 to support butter prices, given that 2025 could be another year of pricey butter and strong milkfat values for farmers.