Pent-up inflation will drive food costs even higher

Consumer prices for food rose 9.4% year-over-year in April, and experts say even higher prices are on the horizon.

Bloomberg, Content provider

May 18, 2022

6 Min Read
Restaurant serving window
RISING COSTS: Average menu prices in April were up 7.2% from a year earlier in the biggest 12-month gain since 1981, according to the National Restaurant Association. Emily Elconin/Bloomberg

With a gallon of milk up about 25% since before the pandemic, and retail bacon 35% higher, it’s hard to imagine how U.S. food inflation could get any worse. But evidence suggests that even higher prices are on the horizon.

Consumers have actually been shielded so far from the full brunt of soaring expenses that are facing producers, distributors and small businesses like restaurants. But they can only hold back for so much longer.

Take the case of Jeff Good, who co-founded three restaurants in Jackson, Mississippi. Around 18 months ago, a 40-pound box of chicken wings cost him about $85. Now, it can go as high as roughly $150. Expenses for cooking oil and flour have nearly doubled in the past five months, he said. But it’s not just ingredient prices going up. He’s paying more for labor and services, too. Even the company that maintains his air conditioners has tacked on a $40 fuel charge per visit. To cope, he’s raised menu prices.

A 15-piece order of chicken wings, a signature dish at his Sal and Mookie’s pizzeria, went for $13.95 before Covid hit. Now, wing costs can vary so much they’re labeled at “market price,” like some restaurants do with lobster. At peaks, the menu price can be about $27.95 — but that represents a barely-there margin — and Good estimates the “real cost” is closer to about $34. He's trying to decide whether to keep raising prices or take wings off the menu.

“We have never, ever seen anything like what we’re seeing right now,” said Good, who opened his restaurants nearly 30 years ago. 

The difference between prices received by producers for their goods and those paid by everyday customers at cash registers can be seen by comparing the producer and consumer price indices.

The CPI, a benchmark for gauging inflation cited in headlines and by economists, has been surging. Consumer prices for food rose 9.4% in April compared with a year earlier, the biggest gain since 1981, government data showed this month. There were record increases for chicken, fresh seafood and baby food.

But many food costs measured in the PPI have been accelerating faster than the CPI rate. In April, average wholesale food prices in the index jumped 18% from a year earlier, according to government data released May 12. It was the largest 12-month increase in nearly five decades. Eggs surged 220%, butter jumped 51%, fats and oils were up 41%, and flour 40%, the National Restaurant Association said.

The data suggest that pent-up inflation in the production and distribution pipeline will continue to filter through to consumer prices. 

“Businesses will do as much as they can to squeeze margins and not pass along higher costs from producers if they see chances that prices will soon reverse,” said Arlan Suderman, chief commodities economist for financial services group StoneX. “However, they will eventually need to pass those price hikes along.”

CPI vs. PPI over years

Price changes for foods included in the CPI basket lag behind the PPI by a month or two, so recent increases for producers “will probably translate into sizable hikes in the prices that consumers see in the next few months,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in an email.

And in the meantime, pressures on food production continue to build, signaling that PPI could keep climbing. Farmers are facing a myriad of challenges, including fertilizer shortages, drought and adverse weather, along with a US bird flu outbreak that’s killed almost 10% of the country’s egg-laying hens. Plus, the war in Ukraine and its effect on fertilizer supply and fuel markets only exacerbate the problems.

All those factors will likely lead to reduced crops, livestock feed, meat and other food supplies — and contribute to more price gains.

Already in April, the US Department of Agriculture hiked its 2022 forecast for producer price inflation for most core foods. Cooking oils and farm-level wheat are expected to jump about 40% this year, compared with December projections of increased prices of as much as 5% and 4%, respectively.

The outlook for higher food prices reflects a broader trend for the U.S. economy. A new era of elevated inflation is likely to prove stubbornly higher than the 1.5%-to-2% range that American consumers, businesses and investors grew accustomed to before the pandemic spike.

“We can expect high inflation to be more persistent,” said Fernando Martin, an assistant vice president at the Federal Reserve Bank of St. Louis. 

The situation also underscores why President Joe Biden has said that Democrats must redouble their efforts to overcome voters’ anger over inflation. Just last week, Biden called inflation “unacceptably high,” but said the responsibility for fighting it lay with the US Federal Reserve.

For food prices, the impact of pent-up inflation will also come from the middle of the supply chain: The distributors that warehouse and deliver food to restaurants and other food-service groups.

Independent distribution companies are seeing higher costs for everything from fuel to equipment to labor, said Mark Allen, chief executive officer of the International Foodservice Distributors Association. Inflation is running in the mid-teens or more among distributors, he said. 

“It’s higher than what the government is publishing,” Allen said, adding that more distributors will likely raise their rates since their margins are just 1% to 2%.

To cope with soaring expenses, restaurants have already passed on some costs. Average menu prices in April were up 7.2% from a year earlier in the biggest 12-month gain since 1981, according to the National Restaurant Association. Diners have also seen shrinking portions.

Still, margins are being squeezed hard. And things could get even worse since many big restaurant chains and food retailers sign long-term contracts for supplies. As agreements inked six or 12 months ago come up for renewal, they’ll likely be set at the current higher costs. 

Even fast food giant Wendy's Co. recently increased its commodity inflation forecast for the year, citing rising costs for favorites like the Baconator and Dave's Double.

Small and independent restaurants typically have far fewer options to buffer higher costs.

“There are core items that have dramatically jumped in price that touch every dish,” said James Mallios, partner in Manhattan restaurant Amali. Butter, oil and beef costs have risen dramatically, he said. Disposable gloves cost about five times more than before the pandemic.

There’s always the risk that continuing to hike consumer prices will lead to demand destruction. That’s part of the reason why retailers and food manufacturers have so far been “sensitive to raising prices too quickly,” said Brian Choi, CEO of Food Institute, which provides research, news and data on the industry. 

“But eventually, they will need to increase prices,” Choi said. “There’s a lot of inflation yet to come.”

© 2022 Bloomberg L.P.

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