1 week Ago By Patrick Varine
Editor’s note: This is the second story in an occasional series on the causes and impact of inflation. Consider the humble Triscuit. Introduced in 1902, it’s been a snack-cracker staple for decades in the U.
S. It’s made primarily from whole-grain wheat, oil and salt — pretty simple as far as processed foods go. And yet its journey from a farm field in Michigan to your kitchen cabinet involves quite a few steps, all of which contribute to its eventual price point at your local grocery store.
The white winter wheat is grown exclusively by farmers in Michigan. It is harvested and shipped to the Mondelez International Bakery in Chicago, where factory workers combine it with the other ingredients to create Triscuits. It is then packaged and packed onto trucks, trains and planes and shipped to distribution warehouses or grocery stores across the country.
And that’s a fairly short chain in terms of the larger, global food economy. “Everything that happens upstream magnifies itself on the way to the grocery store,” said Brian Ferrier, senior vice president of merchandising for regional grocer Giant Eagle. “I think all of those different points along the way are often lost in the microscope that grocery prices are under right now.
” When it comes to inflation in food prices, PNC Financial Services analyst Gus Faucher said the actual creation of the food is among the lower cost inputs that contribute to its final price. “It matters a lot more what’s going on with the labor market where the food is produced, and also in the transportation market,” Faucher said. “You have energy costs factored into getting the food from its sources to markets and stores.
It’s a very long chain.” The final link in that chain, and the one with the least control over prices, is your local grocery store. “The shelf is where the chain ends,” said Giant Eagle CEO Bill Artman.
“We operate on profit margins that are razor-thin in the grocery business.” There are exceptions, such as U.S.
retailer Walmart, but, generally, local and regional grocers are at the mercy of the worldwide food supply chain and the ever-shrinking number of massive companies that dominate its upper echelons. Global aspect Kinks in that chain can take many forms, and they can happen outside the U.S.
Take the Russian invasion of Ukraine as an example. According to Duquesne University economics professor Risa Kumazawa, it not only disrupted Ukrainian grain shipments but also affected oil prices. “When that happens, it affects other things like shipping food, and I think people forget about that,” she said.
“Weather also plays a role. If there is a drought in a food-producing region of the world, prices for certain items will go up.” Phil Lempert, food industry analyst and editor for Supermarket Guru, said he thinks weather is the top driver for food inflation.
“A supermarket might have 50,000 food products, and they all started in the ground somehow,” he said. “We’re having more droughts, more floods, more fires. It affects all crops.
” Take chocolate as an example, Lempert said. “The price has gone up because in Africa the weather has made it much more difficult to grow (cocoa),” he said. A one-two punch of flooding rains in 2023 and drought in 2024 has caused cocoa production levels to plummet in West Africa, according to a recent report by the U.
K.-based nonprofit Energy & Climate Intelligence Unit. The covid shock The Consumer Price Index, which the U.
S. Department of Agriculture uses to track the overall change in food prices, shows that general grocery costs increased nearly 11.5% in 2022 and 5% in 2023, both far above the 20-year historical average of 2.
7%. The figure drops to 1.1% when comparing July 2023 to July 2024, according to USDA data.
The 11.5% spike followed the height of the covid-19 pandemic, which put a shock into the global commerce system that showed how easily worldwide supply chains can be disrupted. “In some ways, the covid market shock had multiple effects on the economy,” said Penn State University agribusiness professor Stan Ernst.
“It had significant effects on the cost of production, whether we’re talking farming or processing. It had significant effects on the ability to deliver food, which, of course, reduced supply.” Faucher said global supply chains couldn’t keep up with consumer demand during the pandemic, which gave goods producers significant pricing power.
“We bought a lot of things,” he said. “And, after demand dropped, some companies ran into trouble. We went through a once-in-a-lifetime experience with the pandemic, and it’s not surprising that we saw the highest inflation in 40 years.
But we’ve seen supply-and-demand normalize, and the (U.S. Federal Reserve) raising interest rates has helped slow inflation as well.
” Faucher said the good news for U.S. consumers and businesses coming out of the pandemic was that strong consumer demand is a big part of why inflation was high.
“Inflation was part of the price we paid for a very strong economic recovery, much stronger than in the rest of the world,” he said. Federal intervention As the 2024 presidential election nears, both Donald Trump and Kamala Harris have talked about a desire to address inflation in grocery prices. But what can the federal government actually do? Lempert said Congress and the Federal Trade Commission “could take a look not at supermarkets, but at food companies’ profits and the way they’ve gone up since the pandemic.
” An FTC report issued in late August asserted that large agribusiness companies sought to protect and expand their market share and power in the wake of pandemic-related food supply disruptions. “The FTC’s report finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve,” said FTC Chair Lina M. Khan.
The report notes that supply chain disruptions did not equally impact every retailer, wholesaler or producer. Instead, smaller firms, especially smaller grocery retailers, disproportionately faced difficulties obtaining products compared to larger firms. The FTC report also recognized “excessive consolidation” as a liability, something Faucher said is worth examining.
“We have seen greater profitability,” he said. “Businesses exist to make money, and if they have the opportunity to increase prices, then they’ll take that opportunity. I’m not going to fault businesses for trying to make an increased profit, but there’s an area for anti-trust enforcement.
” Faucher said the higher market share a company has, the better its ability to pass along price increases. Ferrier said consolidation is happening all around the food economy, including with manufacturing companies that supply food businesses. “I just met with our water vendor, which is about to consolidate with another vendor,” he said.
“That by itself isn’t going to make the news, but it’s part of the whole chain. Some of these acquisitions are very expensive, and someone eventually has to pay for it.” Officials from local grocers Community Supermarket and Safran’s declined to comment for this story.
Price gouging? The nonprofit Food & Water Watch pointed to a U.S. Senate report on corporate profits rising five times faster than inflation between 2020 and 2022.
Critics of those companies, including U.S. Sen.
Bob Casey, D-Pennsylvania, have also pointed to “shrinkflation,” when a company reduces the amount of product per unit while charging the same price. Data and subsequent reports released by Casey’s office in late 2023 point to the price of household paper products like toilet paper and paper towels increasing by nearly 35% per unit since 2019, with more than 10% of the increase achieved by shrinking the size of rolls. Oreos and Doritos increased in price by more than 26% in that time frame, with nearly 10% of the increase owing to less food per unit.
“It’s obvious the cost of toilet paper rose,” Casey said in the report. “It’s harder to detect that rolls shrank in size. But both have the same effect: American families are getting less and corporations are making more.
” Casey has supported a Senate bill called the Price Gouging Prevention Act, which would attempt to define “price gouging” and empower the Federal Trade Commission to go after companies that take advantage of a market shock to increase profits or who charge what the bill calls a “grossly excessive” price for a good or service. It would also require public companies to clearly disclose their costs and pricing strategies in quarterly filings with the U.S.
Securities & Exchange Commission. “Thirty-seven states already have laws on the books to protect consumers from excessive price gouging, and my Price Gouging Prevention Act would protect families across the nation from corporate greed,” Casey said. Faucher isn’t so sure.
“I’m skeptical that efforts to address price gouging are going to bear much fruit,” he said. “The grocery store is just one small part of the chain, and they’ve seen their input and labor costs go up as well.” Looking ahead In taking a top-down look at inflation, Ferrier said Giant Eagle focuses on two primary areas.
“All of the commodities — beef, chicken, etc. — have been on a roller coaster, whether it’s grain for feed, the cost of transportation, avian flu, the spike in consumption during early covid. I think in particular there’s going to be continued pressure on poultry as demand rises and supply doesn’t rise with it.
” Ernst said U.S. consumers have also gotten used to fairly stable and inexpensive prices for food when compared with the rest of the world.
“Despite what most folks think, grocery store profit margins are historically in single digits,” he said. “So when costs of production went up, that led to costs of getting the food product into the grocery store going up. And grocery stores weren’t able to increase the prices of their products because there was so much public resistance to that.
” In that way, Ernst said, inflation “is sort of allowing grocery stores to catch back up.” That also means consumers shouldn’t look for prices to go down anytime soon. “The bottom line is, if you expect grocery prices to go back where they were, say, five years ago, I would expect you to be a little bit delusional,” Ernst said.
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