Food Inflation Flips

Food Inflation Flips

The U.S. Bureau of Labor Statistics reported that food inflation rose 8.5% in March 2023 compared to the prior year. Although food inflation has continued to slow month-over-month, it outpaced energy (-6.4%), headline inflation (+5.0%), and all-items-less-food-and-energy (+5.6%). Food costs remain one of the top concerns for consumers as they navigate a weakening economy.

Food inflation can be divided into two main sub-categories: food-at-home and food-away-from-home. The food-at-home index tracks price changes for retail food, i.e., items bought at the grocery store. In March, the food-at-home index fell 0.3% from February on a seasonally adjusted basis, the first monthly decline since September 2020; however, retail food costs were 8.4% above where they were at the same time last year, still historically high. While prices remain elevated versus the previous year, three of the six major food categories fell from February to March, a welcome sign for consumers. Meat, poultry, fish, and eggs inflation shrank by 1.4%, primarily due to a significant decline in egg prices (-10.9%) as the industry recovers from an avian influenza outbreak that impacted prices near the turn of the year. The fruits and vegetables index fell by 1.3% over the month, driven by lower prices for lettuce (-5.7%), tomatoes (-2.1%), and other fruits (-2.7%), while dairy and related products dropped by 0.1% from the February reading. Falling prices for butter (-6.0%) and fresh milk (-1.0%) were the main contributors to the decrease in the category, while cheese prices stagnated (0.0%), and ice cream and related products rose (+1.2%).

Faced with growing consumer discontent over high grocery bills, retailers like Walmart and Target have slashed their profit outlooks and have taken a more assertive stance with brands over their intended price hikes. While some suppliers were initially apprehensive about slowing or stopping price increases due to their rising/improved profits, dropping unit sales changed their minds.  Conagra Brands and PepsiCo announced that they would not take additional price increases in 2023. said they would pause further price hikes as consumers turn away from branded products and opt for private labels to cut costs.

The decline, or at least pause on grocery prices comes as a reprieve to consumers who are quickly approaching a calendar year of skyrocketing inflation and well into their second year of wage gains lagging cost of living increases. However, this change provides the opposite effect on the food service industry, which has benefited over the past year from inflation growth below that of groceries.

The food-away-from-home inflation index, which measures price changes for eating establishments including full-service, limited-service, vending machines, mobile vendors, and work/school cafeterias, reached +8.8% in March versus the prior year. Although the expiration of free school lunch programs in August 2022 has created a drastic rise in food inflation at elementary and secondary schools, UP 296% year-over-year, the category has seen the lowest monthly growth of all divisions. Full-service (+0.7%), limited-service (+0.5%), and vending machines and mobile vendors (+0.8%) are the drivers of month-over-month increases to the food-away-from-home inflation index due to higher food and labor costs.

Restaurants have profited from a slower rise in prices than at grocery stores as consumers continued dining out, justifying that the price of takeaway meals was relatively equal to, or sometimes even less than purchasing the same ingredients and cooking at home. Dozens of restaurants raised their menu prices to offset higher costs and in some instances, hiked menu prices beyond the headline inflation rate, furthering profits. While this worked initially, sales ebbed in the following months as consumers traded down, particularly during the holiday season. Now, it appears that Americans’ appetite for dining out cannot be beat as customers return to their favorite establishments.

The National Restaurant Association’s recent survey showed that 51% of operators in February reported higher customer traffic compared to the same time last year. Darden Restaurants Inc. also raised its annual sales forecast after beating third-quarter estimates as more patrons flocked to its Olive Garden and Longhorn Steakhouse chains. The CEO commented, “Consumers continue to seek value, which is not about low prices, consumers are making spending tradeoffs, and food away from home is one of the most difficult expenses to give up because going out to a restaurant is still an affordable luxury.” Although Darden foot traffic is up despite a rise in menu prices over the past year, the brand was also one of few who chose to keep menu price hikes below headline inflation. In September 2022, the company said they had been raising prices below headline inflation to protect the value proposition of its brand and avoid negative customer reactions, a decision that has clearly benefited the company months later.

Now, as grocery prices begin to fall and menu prices rise, customers may find greater value eating at home. It is unlikely that labor and supply chain challenges will abate in the near-term leaving restaurants with the choice to shrink profit margins to get customers through the door or further raise prices. With downward pressure from the macroeconomic environment squeezing personal finances and disposable income, it is possible that an “affordable luxury” could become too costly for consumers quickly in the coming months.