Painful grocery bills here to stay

Unless you’re Taylor Swift, you’ve probably noticed the price of eggs has increased dramatically. And, unless you’re Taylor Swift, you’ll be sad to know that your grocery bill won’t go down much this year whatever the headlines say about moderating price pressures. In fact, save a consumer revolt, the inflation of the past two years has created a new, higher price floor.

Companies that supply grocery stores including Pepsico, Coca-cola, Kellogg and Unilever initially raised prices to offset increased costs after the war in Ukraine drove up commodities like wheat and energy and a severe outbreak of avian flu created an egg shortage. Despite widespread complaints, grocery shoppers have broadly been able to handle food inflation, giving companies little reason to peel back prices.

Kellogg attributed its double-digit sales jump last year in part to pricing and Unilever saw revenue expand for the same reason even though volumes fell. Still, executives at branded manufacturers say they haven’t yet fully repaired margins (read: more price increases will likely follow), ignoring the fact that they just delivered the best sales growth in roughly a decade.

The weird thing is that global food commodity prices have actually been decreasing. The United Nations’ FAO food price index fell for a 10th straight month in January, its longest declining streak in at least 33 years. Producer prices for finished foods dropped 1 percent month over month in January, while they continued to rise for consumers (albeit at a slower pace), according to the Bureau of Labor Statistics. Shoppers are now seeing more inflation at the register than food companies and retailers are experiencing.

That makes some sense. The largest chunk of every dollar spent on groceries goes to companies that process, pack, distribute, and sell food. Those pieces of the supply chain account for about 65 cents of every dollar spent on food, with farm production costs making up a much smaller share. All that suggests that declines in commodity prices will have little impact on our food bill.

So why did suppliers and grocery companies raise prices then? Groceries are a low-margin business, where volumes make up for the slim profits on each sale. Over the past few years of economic whiplash and labor shortages, some suppliers saw their margins squeezed despite shrinkflation and outright price increases.

So far, there has been little consumer resistance to higher prices. Unilever, which produces Ben & Jerry’s ice cream and Hellman’s mayonnaise, saw a small dent in volumes, but not enough to offset the beneficial impact of higher prices. Tyson Foods Chief Financial Officer John Tyson said in November that the company’s pricing actions not only offset higher input costs but “led to higher sales during the year.” I suppose it’s hard to replace those Jimmy Dean breakfast sandwiches.

That may change as Federal Reserve interestrate hikes work their way through the economy, constraining wallets. On top of that, millions of Americans will lose pandemic-related emergency allotments of the Supplemental Nutrition Assistance Program at the end of this month. Food insecurity that’s been on the rise for months will almost certainly worsen.

For now, robust consumer spending is giving companies little reason to pass any deflation on to shoppers. Whether she knows it or not, Taylor Swift will need to stomach high grocery bills with the rest of us. And for some, the solution will be an empty stomach.