The recent good news is that inflation has started to slow down. However, this might not provide much relief to the American consumer since slowing inflation still translates to rising prices. In January, the cost of groceries only increased by 0.3% from the previous month, but it has surged by 28% since January 2019. This explains why Americans are still shocked when they see their grocery bills.
It might seem counterintuitive that prices are still on the rise, especially considering that many of the events that initially triggered high inflation, such as the COVID-19 pandemic, supply chain disruptions, and the Ukraine war, occurred years ago. However, food inflation is influenced by numerous factors.
To illustrate these factors, we chose a meal commonly eaten by American households – a cheeseburger and fries – and examined the drivers of price increases for different ingredients.
Wells Fargo's chief agricultural economist, Michael Swanson, delves into the factors leading to price hikes for various components:
White bread: Up 59% since 2019
Bread prices experienced a notable increase since the beginning of the pandemic. Although the exact increase in dollars is not substantial, with a pound of white bread currently costing $2.03, up from $1.27 in January 2019, the reasons for this spike are significant. The price of bread remained extremely low for an extended period, leading to a decline in prices from 2014 to 2019 due to accessible wheat and intense competition among bakeries. However, prices began to surge early in 2022 after the Russian invasion of Ukraine and the subsequent spike in wheat prices. Although wheat prices have since decreased, the war provided producers with a pretext to raise prices as bakeries aimed to cover their labor, energy, and transportation costs. Consequently, the price inflation is expected to persist for some time.
Processed cheese: Up 25% since 2019
In 2022, the low price of milk compelled farmers to reduce their herds, leading to an anticipation of a cheese shortage, which sparked fierce competition among cheese buyers. This pushed cheese prices to their peak in April 2022. A similar pattern may be occurring presently, with recent milk production reports indicating signs of reduced herds.
Ground beef: Up 32% since 2019
The declining cattle inventory in the U.S., reaching the lowest levels since 1951, has contributed to higher beef prices due to increased costs for cows and calves. Several years of drought in key cattle-raising regions led to elevated feed expenses and prompted farmers to sell off their cattle, including female cows usually reserved for breeding. Despite increased rainfall from El Nino and a record corn harvest, the cost of rebuilding herds, coupled with high borrowing rates and expensive cows, indicates that beef prices are unlikely to decrease soon. Economists from the American Farm Bureau Federation predicted that 2024 would see record-high beef prices in grocery stores.
Tomatoes: Down 1% from 2019
Unlike many other foods, tomato prices have not seen significant increases over the past four years, partly due to pre-existing high costs in comparison to other fruits and vegetables. Additionally, the price of tomatoes is influenced by trade regulations, as U.S. and Mexican producers have agreed to set prices since 2013 to avoid disparities between the two countries' farmers.
Potatoes: Up 30% from 2019
Drought and wildfire smoke severely affected potato crops in 2021 and 2022, leading to diminished yields and subsequently higher prices. However, in 2023, U.S. potato production increased for the first time in seven years, offering some respite from the elevated prices.
Romaine Lettuce: Up 19% from 2019
A virus transmitted by insects caused significant damage to lettuce crops in California in 2022, resulting in a surge in costs. Although prices have declined since then, the ongoing higher labor and transportation costs have discouraged suppliers from reducing prices further.
In addition to grocery prices, dining out is becoming more expensive, with wages rising in a competitive job market. Across various fronts, costs are skyrocketing, necessitating pricing adjustments. Meyer’s Old Dutch, a hamburger restaurant, has increased its burger price to $16 from $13 in 2019, primarily due to the surge in labor costs. Before the pandemic, the expenses for food and supplies surpassed those for labor, but the situation has reversed, with labor now constituting a higher share of the costs.
In conclusion, while inflation may have slowed down, the impacts on consumer budgets are still noticeable, particularly in the grocery and dining-out sectors.