Grocery store prices aren’t going down anytime soon

New York
CNN business

Soothing news for US shoppers: Grocery bills see little relief.

Food prices rose 13.5% in August from a year earlier, the biggest annual increase since March 1979, according to government data.

Executives at major food manufacturers and analysts expect inflation to hover around that level for the remainder of 2022.

Next year, the rate of food inflation is expected to moderate, but this does not mean that prices will fall. When prices reach a certain level, they tend to stay there or go up, but only slightly.

Several factors have contributed to the increase in prices. Producers say they are paying higher prices for labor and packaging materials. Extreme weather, like droughts or floods, and diseases, like deadly bird flu, are damaging crops and killing egg-laying hens, squeezing supplies.

Even if some of these conditions stabilize, these changes will take some time to reach consumers.

“There’s a lot of uncertainty,” said David Ortega, a food economist and associate professor at Michigan State University. It is not clear when the war in Ukraine will end, nor how the weather will affect crops in the future. “That’s one of the reasons prices are taking longer to come down.”

Producers “see no end to inflation in terms of their labor and cost of goods,” said KK Davey, president of customer engagement at market research firm IRI. The company expects food inflation to rise between 5% and 10% next year.

Meanwhile, demand is high. Consumers may hold back on some discretionary items, but they have to eat. And paying higher food prices can still be cheaper than dining out, where menu prices are also rising (albeit more slowly). And many people continue to work from home and consume more of their meals at home.

This imbalance means that companies can charge higher prices to buyers without declining sales.

“The cycle will break when supply is high and demand moderates,” Davey said.

“We expect 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 energy, transportation, packaging and raw material costs remain high, and he predicted more price increases to offset those increases.

General Mills ( GIS ), which makes everything from Cheerios to Blue Buffalo pet food, expects its costs to rise 14% to 15% for fiscal 2023 due to rising prices for ingredients like nuts, fruits and flavors. . The company plans additional price increases for retail customers.

For now, consumers have not balked at higher prices, CEO Jeff Harmening said on the September earnings call.

“So far, we have not seen any change in elasticities, which has been positive for us in the quarter,” he said. Elasticity refers to how easily customers change their purchasing behavior in response to higher prices. Consumers accepted the higher prices more than General Mills would have expected, Harmening noted.

With costs continuing to rise and people continuing to buy, there’s little reason for companies to discount products.

“We believe that the risk of a significant rise in promotions in the next quarters is relatively low,” Harmening said on the call.

For manufacturers to increase promotions, supply chain disruptions would have to end and costs would have to come down significantly, he said. “We don’t see any of those things.”

In general, prices tend to rise over time. Government data shows that from 1974 to 2021, food prices fell in only two years. Every year, they increased, although in some years the increase was very small.

“There is always a general increase in prices,” said food economist Ortega. “That’s just the nature of the economy.”

Typically, though, food prices rise about 2% to 3% a year, he said — a much slower pace than the rise happening now.

In the past, consumers may not have noticed higher prices because their wages kept pace with the increase. Right now, that’s not the case.

“Consumer prices are rising faster than wages are rising,” he said. “What we’re seeing now is a cost-of-living crisis.”

Food prices, in particular, are sticky, no matter how much of a hassle it is to change them.

When food manufacturers raise prices for retailers, those retailers don’t necessarily pass the price on to consumers. Some may choose to keep prices low, if they can afford it, to attract customers to the store.

Retailers also don’t like gradual price increases because it frustrates consumers, said Andy Harig, vice president of tax, trade, sustainability and policy development at the food industry association FMI.

“A lot of people shop every week … and there’s a lot of consistency in what they buy,” he said. So when prices change, even slightly, they “really notice and feel those changes.”

When retailers change prices in stores, they must print new labels and enter the new values ​​into their sales systems. Stores carry thousands of different items, so when prices go up in different categories, making adjustments becomes a lot of work.

That means “when you see increases happen, they tend to stay put,” Harig said.