Food Pricing Increases, Why?

Food Prices Rose 28% In 5 Years. Here’s Why,

– by Taryn Phaneuf

NerdWallet

No single factor can explain why food is so much more expensive now than before the pandemic. Food prices — which are up 28% since 2019 — remain high because of the combined impact of rising operating costs, supply-chain disruptions and corporate profits.

• Higher production, labor and fuel costs have rippled through every aspect of the food system.
• Supply chain disruptions caused by global events, severe weather and disease have affected many essential crops and livestock.
• Some food companies that sought to maintain — or increase — profitability while facing these volatile conditions.

Some of these factors affect food production across the board while others affect only some products. Here’s a deeper look at why food prices are high.

AB: If you have worked on manufacturing throughput, the one thing you look for is what impacts the cost. The largest component of which has the greatest impact. Typically, it is not Labor. If all things are equal to what was in the past, then why is there a price increase? I would ask for a list of cost drivers (because I could ask for such) and the history of them (because I could). Moving on . . .

Operating Costs

From farm to supermarket, everyone has people to pay, equipment or raw materials to buy and vehicles to fuel. And those operating costs have become more expensive over the past few years. That adds to the cost of the food you purchase at the store in more than one way.

The simplest way is that the higher costs get passed along. For example, when gas prices rise, the cost of food tends to rise. The price of a gallon of diesel fueling farm equipment as well as trucks delivering inventory to stores increased 22% since the start of 2020. This is U.S. Energy Information Administration data.

A more complicated way higher operating costs lead to higher prices at the grocery store can be illustrated with one staple that’s stubbornly expensive right now: “Beef.”

AB: And I would ask the question of why did the cost increase? The author gives us an answer.

Years of drought, high grain prices and rising interest rates made cattle farming so expensive that many U.S. farmers reduced the size of their herds to cut costs — and some got out of the business altogether. Now, the U.S. cattle inventory is the smallest it’s been since 1951. That huge drop in supply has pushed prices for ground beef and sirloin steak to all-time highs.

AB: There is input here which leads to increases in cost which should be passed on in pricing unless other suppliers can produce at a lower cost. And then the question is: Why can they and I can not? If all costs remain the same and demand is the same, less inventory does not necessitate a price increase. However, some buyers may pay more to gain the inventory.

Supply-chain disruptions

Sudden, sometimes unavoidable events can create supply shocks that drive up food prices. The sources and intensity of those supply shocks vary. Here are just a few examples of events that recently impacted food supplies and sent prices soaring.

The pandemic created a sudden surge in demand for groceries as lockdowns forced people to stay home. At the same time, food production slowed as COVID-19 spread and workplaces enacted new protocols meant to mitigate health risks to employees. You might remember items like yeast or meat became almost impossible to find. Prices for popular items soared as grocery stores and their suppliers struggled to keep up with consumers.

The war in Ukraine continues to affect that country’s food exports. As “the breadbasket of Europe,” Ukraine historically accounted for 9% of the global wheat market and 12% of the corn market, according to the USDA’s Foreign Agricultural Service.

A highly contagious and fatal bird flu first appeared in U.S. poultry at the start of 2022 and has wreaked havoc on the national population of egg-laying hens since then. Consequently, egg prices peaked at $4.82 per dozen in January 2023. While they’ve receded from that level, they’re still volatile.

AB: I have told the story of an automotive semiconductor supplier increasing the automotive negotiated price for their product to us. I listened to him as I did not have a basis to argue the point. At the end of the announcement, he said we could take it or leave it. He also had no basis to increase the price other than the control of supply. We could go back to Chrysler and tell them their supplier raised prices or just eat it and keep the issue in the back of my mind for future reference. We ate it as we had no control over an OEM appointed supplier other than to (in the future) have an alternate supplier (which Chrysler did not have) in the future. Supply does not directly impact the cost of manufacture,

AB: So, what was this all about?

Corporate profits

Despite the headwinds described above, grocery stores’ profit margins increased in recent years, according to a March 2024 report by the Federal Trade Commission. The FTC report notes that food and beverage retailers saw their revenues outpace their costs by more than 6% in 2021. That was a new high for that particular profit measure until 2023, when it reached 7%.

Food manufacturers have relied on price hikes and other tactics to maintain profitability, as well. Take chocolate for example, which has become even more expensive to make this year because of record-high cocoa prices. Companies saw shoppers become more sensitive to chocolate prices as they went up. While shoppers spent more money on chocolate in each of the past two years, they actually cut back on the quantities they bought, according to NielsenIQ data provided to NerdWallet in March.

When that happens, companies know they can’t keep raising prices without further impacting their sales volume. Instead, they make other product changes, like shrinking packages, giving you less product for the same price. That maneuver is known by detractors as shrinkflation.

Members of Congress and the Biden administration have taken turns slamming food companies for these tactics. President Joe Biden called out “shrinkflation” during his State of the Union speech in March. And Sen. Elizabeth Warren blamed high grocery prices on “corporate price gouging” during a Senate subcommittee hearing on high food prices in May.

FTC Chair Lina Khan has said she wants the commission to launch an inquiry into big grocery chains’ pricing practices.

During an Aug. 1 meeting of the Strike Force on Unfair and Illegal Pricing, an interagency committee targeting corporate pricing in numerous industries, Khan said the FTC wants to understand why prices remain high even as costs have declined and supply chains have improved. “We want to make sure that major businesses are not exploiting their power to inflate prices for American families at the grocery store.”

Will food prices go down in 2024?

Food prices are expected to keep increasing in 2024, albeit at a much slower pace than they did in recent years, according to the USDA Economic Research Service food price outlook updated in July.

In October, food prices — including food at home (groceries) and restaurant purchases — increased 0.2% from the previous month, according to the consumer price index report released Nov. 13 from the Bureau of Labor Statistics. The CPI, which serves as a proxy for inflation, measures changes in average costs of items in a given period.

The report shows food prices are 2.1% higher than they were 12 months ago. By comparison, the annual food inflation rate in October 2023 was 3.3%.

Grocery prices were 1.1% higher year-over-year in October. They went up 0.1% in the past month.

Restaurant prices were 3.8% higher year-over-year. They rose 0.2% from September to October. Specifically:

• Full-service meals (at sit-down restaurants) cost 0.2% more in October and 3.7% more year-over-year.

• Limited service meals (takeout only) cost 0.2% more in October and 3.8% more compared to the same time last year.

How inflation is hitting your grocery bill

On the whole, grocery price inflation slowed in October. But food prices don’t move uniformly, and prices for some items were more volatile than others this month. Egg prices fell 6.4% from September to October, but they’re up 30.4% from a year ago.

How are food prices tracked?

Food prices are tracked by several federal agencies, including the Bureau of Labor Statistics and the Bureau of Economic analysis.

The Bureau of Labor Statistics tracks the CPI, which measures the change in average price that consumers pay for goods and services, including food. So the CPI is also a measure of inflation. 

In the CPI, the cost of food is of high relative importance to the overall index, compared to the other tracked goods and services. Food costs make up 13.4% of the index, to be exact. Its importance is second only to shelter (34.73%). But food prices, like energy, also tend to be more volatile, and for that reason it is usually left out of the “core inflation” version of the index.

The Bureau of Economic Analysis measures the personal consumption expenditures price index. The PCE tracks how much consumers spend on goods and services, as well as how consumers change spending habits in response to price shifts. Food is considered a non-durable good in its analysis. Core PCE — the Federal Reserve’s preferred measure of inflation — also excludes food and energy. 

The U.S. Department of Agriculture measures the cost of different food plans. These plans are adjusted each month, based on CPI data and average family income levels: thrifty or low, moderate and liberal. The Thrifty Food Plan is the basis for the Supplemental Nutrition Assistance Program, or SNAP.