by Amy Yee and Tarso Veloso Ribeiro | Bloomberg
With a gallon of milk up about 25% and retail bacon up 35% since pre-pandemic, it’s hard to imagine food inflation in the U.S. getting worse. But there is evidence that higher prices are coming.
So far, consumers have been effectively shielded from the soaring fees faced by small businesses such as producers, distributors and restaurants. But they can only endure so long.
Take Jeff Good, who co-founded three restaurants in Jackson, Mississippi. About 18 months ago, a 40-pound box of chicken wings cost him about $85. Now, it can go up to about $150. The cost of cooking oil and flour has nearly doubled in the past five months, he said. But it’s not just raw material price hikes. He’s also paying more for labor and services. Even the company that maintains his air conditioner charges $40 for fuel per visit. In response, he raised menu prices.
A 15-piece chicken wing, a signature dish at his Sal and Mookie’s pizzeria, was $13.95 before Covid hit. Wings now vary widely in cost, and they’re labeled “market price” like some restaurants do with lobster. At peak, menu prices may be around $27.95 — but that’s a tiny margin — and Good estimates the “real cost” to be closer to around $34. He’s trying to decide whether to keep raising prices or scrap the menu.
“We’ve never seen anything like this,” said Goode, who opened his restaurant nearly 30 years ago.
By comparing the producer and consumer price indices, it is possible to see the difference between the price of goods received by producers and the price paid by everyday customers at the cash register.
The CPI, a measure of inflation cited by headlines and economists, has been surging. Government data this month showed consumer food prices rose 9.4 percent in April from a year earlier, the biggest gain since 1981. Chicken, fresh seafood and baby food saw record increases.
However, many food costs, as measured by the PPI, have grown faster than the CPI. Average wholesale food prices in the index rose 18 percent in April from a year earlier, according to government data released on May 12. It was the largest 12-month gain in nearly 50 years. Eggs are up 220%, butter is up 51%, fat is up 41% and flour is up 40%, the National Restaurant Association said.
Data suggests that pent-up inflation in production and distribution channels will continue to filter into consumer prices.
“If companies see the potential for a price reversal soon, they will do what they can to squeeze profits instead of pushing higher,” said Arlan Suderman, chief commodities economist at financial services group StoneX. “However, they will ultimately need to pass these price increases on.”
Changes in food prices included in the CPI basket lag the PPI by a month or two, so recent price increases by producers “may translate into the sharp price increases that consumers will see in the coming months,” Chief U.S. Economist Stephen Stanley Amherst Pierpont Securities said in an email.
At the same time, pressure on food production continued to increase, suggesting that PPI may continue to climb. Farmers are facing numerous challenges, including fertilizer shortages, drought and severe weather, and an outbreak of bird flu in the United States that killed nearly 10 percent of the country’s laying hens. Furthermore, the war in Ukraine and its impact on fertilizer supplies and fuel markets will only exacerbate these problems.
All of these factors could reduce the availability of crops, livestock feed, meat and other food items and lead to higher prices.
Back in April, the USDA raised its 2022 producer price inflation forecast for most core foodstuffs. Edible oil and farm wheat prices are expected to rise about 40 percent this year, compared with 5 percent and 4 percent, respectively, forecast in December.
The prospect of higher food prices reflects broader trends in the U.S. economy. A new era of high inflation could stubbornly rise above the 1.5% to 2% range U.S. consumers, businesses and investors were accustomed to before the pandemic hit.
“We can expect high inflation to be more persistent,” said Fernando Martin, assistant vice president at the Federal Reserve Bank of St. Louis.
The situation also highlights why President Joe Biden has said Democrats must redouble their efforts to overcome voter anger over inflation. Just last week, Biden called inflation “unacceptably high,” but said the responsibility for tackling it rested with the Fed.
For food prices, the impact of pent-up inflation will also come from the middle of the supply chain: distributors who store and deliver food for restaurants and other food service groups.
Mark Allen, chief executive of the International Association of Foodservice Distributors, said independent distribution companies were seeing rising costs for everything from fuel to equipment to labor. Distributors have inflation in their teens or more, he said.
“That’s higher than what the government has announced,” Allen said, adding that more distributors may raise rates because their profit margins are only 1% to 2%.
In response to soaring expenses, restaurants have passed on some costs. Average menu prices rose 7.2% in April from a year earlier, the biggest gain in 12 months since 1981, according to the National Restaurant Association. Diners also saw a portion reduction.
Still, profits were severely squeezed. The situation could get worse as many large restaurant chains and food retailers sign long-term supply contracts. With agreements signed six or 12 months ago due for renewal, they are likely to be set at the current higher cost.
Even fast-food giant Wendy’s Co. recently raised its forecast for commodity inflation this year, citing rising costs of favorites like bacon and Dave’s double.
Small independent restaurants often have few options to buffer higher costs.
“Every dish has a core item with a huge price increase,” said James Malios, a partner at Manhattan restaurant Amali. The cost of butter, oil and beef has risen sharply, he said. Disposable gloves cost about five times what they were before the pandemic.
There is always a risk that continued increases in consumer prices will lead to demand destruction. That’s part of the reason retailers and food manufacturers have so far been “sensitive to raising prices too quickly,” said Brian Choi, chief executive of the Food Institute, which provides research, news and data on the industry.
“But ultimately, they will need to raise prices,” Cui said. “There’s still a lot of inflation to come.”
