Grocery prices climbed 13.5% in August from the year before, the highest annual increase since March 1979, according to government data. Executives at large food manufacturers and analysts expect inflation to hover around this level for the rest of 2022.
Next year, the rate of food inflation is expected to moderate, but that doesn’t mean prices are going to drop. Once prices hit a certain level, they tend to stay there or go up, but rarely down. A number of factors have contributed to the surge in prices. Producers say they’re paying higher prices for labor and packaging materials. Extreme weather, like drought or flooding, and disease, like the deadly avian flu, have been hurting crops and killing egg-laying hens, squeezing supplies.
Even if some of these situations stabilize, it will take a while for those changes to reach consumers. “There’s a lot of uncertainty,” said David Ortega, food economist and associate professor at Michigan State University. It’s not clear when the war in Ukraine will end, or how weather will impact crops in the future. “That’s one of the reasons why prices take longer to come down.”
Producers aren’t “seeing any end to inflation in terms of their labor and commodities cost,” said KK Davey, the president of client engagement at market research company IRI. The firm expects food inflation to rise between 5% and 10% next year. Meanwhile, demand is high. Consumers may be able to pull back on some discretionary items, but they have to eat. And paying higher grocery prices may still be cheaper than dining out at restaurants, where menu prices are also rising (though at a slower clip). And many people are still working from home and consuming more of their meals there. This imbalance means companies can pass along higher prices to shoppers without sales plunging. “The cycle will break when supply is high and demand moderates,” said Davey.
Companies continue to raise prices
“We do expect the near-term inflation to remain high,” Mondelez (MDLZ) CEO Dirk Van de Put said on an earnings call this summer. The maker of Oreo and Ritz said that its energy, transportation, packaging and raw materials costs remain elevated, and it announced further price increases to offset those increases.
General Mills (GIS), which makes everything from Cheerios to Blue Buffalo pet food, expects that its costs will increase by 14% to 15% for its 2023 fiscal year, led by a rise in prices of ingredients such as nuts, fruits and flavors. The company is planning additional price hikes for its retail customers. For now, consumers haven’t balked at the higher prices, noted CEO Jeff Harmening during a September earnings call.
“So far, we haven’t seen really any change in elasticities, which for us was a positive in the quarter,” he said. Elasticity refers to how easily customers change their shopping behavior in response to higher prices. Consumers accepted the higher prices more than General Mills would have expected, Harmening noted. Between costs continuing to rise and people continuing to buy, there’s little reason for companies to discount their products. “We think the risk of promotions ramping up significantly over the next couple of quarters is quite low,” Harmening said during the call. For manufacturers to increase promotions, supply chain disruptions would have to end and costs would have to fall significantly, he said. “We don’t see any of those things.”
Why grocery prices are so sticky
In general, prices tend to go up over time. Government data shows that from 1974 to 2021, grocery prices dropped only during two years. Every other year, they went up, though some years the increase was very slight. “There’s always a general increase in prices overall,” said Ortega, the food economist. “That’s just the nature of the economy.”
Typically, however, grocery prices go up about 2% or 3% a year, he said far slower a pace than the increase happening now. In the past, consumers may not have noticed higher prices because their wages kept pace with the increases. Right now, that’s not the case.
“Consumer prices are increasing faster than wages are increasing,” he said. “What we’re seeing now is really a cost of living crisis.” Grocery prices in particular are sticky also because of how much of a hassle it is to change them.
When food manufacturers raise prices for retailers, those retailers don’t necessarily pass prices along to consumers. Some may opt to keep prices low,if they can afford it,to attract customers into the store. Retailers also don’t like to raise prices little by little because it frustrates consumers, said Andy Harig, vice president of tax, trade, sustainability and policy development at FMI, a food industry association. “A lot of people shop every week … and there’s lots of consistency in what they buy,” he said. So when prices change, even slightly, “they really notice that, and feel those changes.”
When retailers do switch prices in stores, they have to print out new labels and enter the new values into their sales systems. Stores carry tens of thousands of different items, so when prices go up across different categories, making adjustments becomes a ton of work.
That means that “when you do see increases happen, they tend to stay in place,” Harig said.