Inflation cooling? Why are supermarket prices still so high!

   In the fall of 2023, data released by the U.S. Bureau of Labor Statistics (BLS) showed that the year-on-year increase in the overall consumer price index (CPI) had fallen from a peak of 9.1% in June 2022 to 3.7%.

However, when ordinary families walk into the supermarket, the high food prices are still like a heavy stone weighing on their hearts. Although the prices of daily necessities such as beef, eggs, and dairy products have fallen from last year, they are still far higher than the pre-epidemic level.

Why is there a temperature difference between official inflation data and the actual feelings of the people? What structural contradictions are hidden behind the high food prices? This article will reveal the truth about the "difficulty in cooling down" of supermarket prices in the United States through data analysis and industry observation.

1. Data fog: overall inflation cooling ≠ food price decline

Although the overall CPI in the United States has slowed down for several consecutive months, the "stubborn" inflation of the food sub-item has become an exception. According to BLS data, food prices rose 3.7% year-on-year in September 2023, which is lower than the historical high of 11.4% in March 2022, but it is still nearly twice the increase in the overall CPI.

What is more noteworthy is that the month-on-month growth rate of food prices rebounded several times in 2023: for example, food prices rose 0.2% month-on-month in September, while the overall CPI remained flat month-on-month during the same period.

This differentiation stems from the particularity of the food supply chain. Unlike commodities such as energy and used cars that are greatly affected by international market fluctuations, food prices are more directly dominated by domestic production costs, labor markets and consumption habits.

Even though the Federal Reserve has suppressed overall demand by raising interest rates, the supply-side pressure in the food industry has not been fully released.

2. Supply chain "scars": layer-by-layer transmission from farmland to shelves

Agricultural costs remain high

According to the U.S. Department of Agriculture (USDA), the production costs of American farmers in 2023 will still rise by 6.2% year-on-year, including a 15% year-on-year increase in fertilizer prices and an 8% increase in fuel costs.

Although the global fertilizer shortage caused by the Russian-Ukrainian conflict has eased, prices are still more than 50% higher than in 2019. In addition, frequent extreme weather (such as drought in California and floods in the Midwest) has further increased the risk of crop yields, forcing farmers to transfer costs by raising prices.

Logistics and warehousing bottlenecks continue

Although global shipping prices have fallen from their peak in 2021, the shortage of domestic truck drivers in the United States remains severe. The American Trucking Association (ATA) estimates that the current industry gap is about 80,000 drivers, resulting in a 7% year-on-year increase in transportation costs.

At the same time, warehouse rents continue to rise, and the national warehouse vacancy rate fell to a historic low of 3.1% in the third quarter of 2023, further pushing up food distribution costs.

Labor market "tight balance"

Labor costs in the US food processing and retail industries are still rising. In September 2023, the average hourly wage in the leisure and hospitality industry (including supermarket employees) increased by 5.1% year-on-year, far higher than the pre-epidemic level.

In order to attract employees, companies have to increase wages and bear higher health insurance expenses, and these costs are ultimately passed on to consumers.

3. Corporate pricing strategy: Profits take precedence over price cuts

In inflationary cycles, companies often adopt a "delayed price cut" strategy: quickly raise prices when costs rise, but delay price cuts to protect profit margins when costs fall. This phenomenon is particularly evident in the food industry.

Take the US food giant General Mills as an example. Its fiscal 2023 financial report shows that despite the year-on-year decline in prices of raw materials such as wheat and sugar, the company has maintained its gross profit margin at 35.5%, close to its historical high, through a "prudent pricing strategy."

 Similarly, Tyson Foods has maintained high prices by launching high-end product lines (such as organic beef) despite falling beef costs.

"Consumers are more price sensitive, but companies are more concerned about the sustainability of profit margins."

Emily Williams, a consumer industry analyst at Morgan Stanley, pointed out that "the proportion of private label products on supermarket shelves has increased from 18% before the epidemic to 24%, reflecting the strategy of retailers to balance costs and demand through differentiated pricing."

4. Changes in consumption habits: from "stockpiling" to "exquisite saving"

High inflation is reshaping Americans' shopping carts. According to data from market research company Numerator, the average shopping basket amount of American consumers in supermarkets in 2023 will decrease by 2.1% year-on-year, but the frequency of shopping will increase by 15%.

This shows that families are coping with pressure by "buying less and running more" and choosing cheaper goods.

The rise of discount retail

The customer traffic of discount supermarkets such as Costco and Aldi has surged by 20% year-on-year, while the customer traffic of traditional supermarkets such as Kroger has only increased by 3%. Consumers turn to large-packaged goods and private brands. For example, the price of Aldi's private brand milk is 30% lower than that of national brands.

Protein consumption downgraded

Beef consumption fell 5% year-on-year, while chicken and soy product consumption increased by 8% and 12%, respectively. This trend is more significant among low-income households, reflecting the shift from "elastic consumption" to "essential consumption."

5. Policy lag effect: The Fed's "cooling down" takes time

Although the Fed has raised interest rates 11 times since March 2022, pushing the federal funds rate to 5.25%-5.5%, there is a lag of 12-18 months in the transmission of monetary policy. This means that the impact of high interest rates on the food supply chain will not be fully apparent until the second half of 2024.

In addition, food prices are less sensitive to interest rates than interest rate-sensitive commodities such as housing and automobiles.

Roger Ferguson, former vice chairman of the Federal Reserve, pointed out: "Even if inflation falls overall, the stickiness of food prices may last longer because supply chain adjustments take time and companies are reluctant to easily give up the pricing power they have obtained."

6. When will food prices return to "normal"?

Most economists predict that the increase in US food prices will slow further in 2025, but may still be higher than pre-pandemic levels. For ordinary families, the following strategies may ease the pressure:

Prioritize the purchase of seasonal discounted goods (such as Thanksgiving turkeys);

Join supermarket membership programs to get exclusive discounts;

Replace some meat with beans and eggs to reduce protein costs.

The stubbornness of US food prices reflects the complexity of economic recovery in the post-pandemic era. Supply chain reconstruction, changes in corporate pricing logic and evolution of consumer behavior together constitute a "price stickiness" that is difficult to quickly eliminate.

For policymakers, how to find a balance between curbing inflation and avoiding a hard landing of the economy remains the core challenge in 2025. And for every family, the "new consumerism" of careful calculation may become the most realistic survival wisdom in the inflation cycle.