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Experts Optimistic That Inflation Will Decrease Over Course Of Year

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Major influencers include severe weather events, trucking and labor issues

FMI – the Food Industry Association hosted a briefing March 15, “Impact of Inflation on Grocery Shopper Buying Habits: Looking Inside Inflation’s Black Box,” to cover what lies ahead for food prices in 2023. 

The briefing looked at how higher prices have impacted shopper buying habits and how grocers are responding to the economic climate and evolving consumer trends.

While there are positive signs that the worst of food price inflation is over, the U.S. is not out of the woods yet, according to Andrew Harig, VP of tax, trade, sustainability and policy development at FMI. He was joined by FMI’s Rick Stein, VP of fresh foods, and Ricky Volpe, associate professor of agribusiness at CalPoly.

Harig said prices for key commodities like meat, poultry, fish and eggs declined over the past month. The latest CPI data, however, showed that inflationary price increases are not “resetting as quickly or as uniformly as consumers would like.” He added that, after a tough 2022, there could be more volatility in the coming months due to the rise and fall of inflation, with the likelihood of food prices remaining elevated in the short term.

“In 2022, we witnessed energy prices becoming increasingly volatile, creating uncertainty for one of the industry’s most critical input costs. We also continue to monitor severe weather events, trucking and labor issues, all of which serve as key influencers on inflation,” Harig said.

Food price concerns are front of mind for shoppers. A recent FMI consumer poll on U.S. grocery shopper trends revealed:

  • 48 percent of shoppers report being extremely concerned about grocery store prices rising
  • 43 percent of them are concerned about having enough money to pay for the food they need (up from 35 percent in October); and
  • 76 percent of consumers are concerned about prices rising on the foods they prefer (up from 61 percent since October). 

Even so, the food retail economic picture “is not all doom and gloom, and in fact there are some real bright points,” Harig said.

Recent FMI shopper data shows consumers are spending an average of $151 per week at the grocery store, which is not much higher than the average $148 weekly spend in October 2022. Harig noted that consumers also are having “a somewhat distorted perception of the inflationary environment, which is impacting their feelings toward the shopping experience.”

In looking at expectations regarding the cost of food at the grocery store in the coming months and year, Volpe said it is a complicated time for food prices, as the U.S. is coming out of a period of historical inflation.

“In 2022, we saw the highest year-over-year food price inflation that we’ve seen since the 1970s, and everybody’s waiting for it to come down. And it is coming down. But it’s coming down very slowly.”

He added that he is optimistic that inflation will fall as the year goes on. Looking at “the most upstream big picture indicators, we’re looking at relative normalcy.”

He noted, however, that as inflationary pressures decrease at the start of the food supply chain, it takes time for that to transmit down the chain to retail shelves. 

Volpe said he also looks at the producer price indices, which are the measures of business-to-business prices paid within the food supply chain. This data is a more forward-looking gauge than looking directly at retail prices.

He also noted that for most major categories of food spending, the upstream farm and wholesale prices are flat or declining. On the other side, however, he said many structural challenges remain for the food supply chain and the agribusiness sector. Transportation and labor also present challenges for most food companies.

“I think the cost of doing business has gone up, and it’s become more challenging. It’s another reason why inflation and prices aren’t really coming down in a meaningful way,” Volpe said. “We’re really hoping for some relief in those regards for food companies of all stripes, from producers to manufacturers to retailers, as the year goes on.”

In some food categories, there are specific issues going on that are causing higher prices, according to Volpe. These include eggs, largely because of the avian flu; wheat, which is under “tremendous price pressure globally because of the conflict in Ukraine;” and most foods that are soybean or oil based, Volpe said. 

He said long term, he thinks the U.S. is on track toward a “much more normal year-over-year food price inflation going into 2024. I don’t think we’ll hit it this year, but maybe next year.”

Private brands

Harig noted that inflation has caused some consumers to turn to private brands in an effort to save money. In a recent survey, 41 percent are buying more private brands due to inflation and other factors, such as the COVID-19 pandemic. He said this momentum is expected to continue in 2023.

However, the increased interest in private brands isn’t solely based on price and affordability. Harig said additional factors include quality, taste, sustainability and contributions to health and well-being.

As a result, grocers have “dramatically improved” the quality of their private store brand offerings. In addition to the benefit for shoppers, he said grocers “increasingly see private brands as an avenue to reinvent themselves in the marketplace and differentiate them from the shop next door.”

Volpe said he thinks private labels are “very, very interesting.” He said in Western Europe and the U.K., private labels or store brands are dominant, with the national brands being “almost more niche.” He mentioned the rise of vertically integrated store brands in the U.S. food system. “Almost every day you see this greater proliferation of these vertically integrated brands from retailers across the board.”

According to Volpe, retailers – mainly larger ones – are cutting out the middle man and investing in food production, processing and manufacturing, “actually making these private labels literally from the ground up.”

In addition to lower prices, this also makes them more competitive with national brands, which is a win for both retailers and consumers, Volpe said.

“That’s just one force sort of working to help moderate food prices and keep those prices down a little bit from within the black box of the food supply chain…it’s one of the ways that I see the food retail sector evolving in a really exciting and positive way.”

Innovation, buying local

Innovation in the U.S. food system is “one of the best tools we have to counter food price inflation and help ensure the availability of bountiful food for everybody,” Volpe said. 

Harig noted that one area where there is a lot of innovation is in helping consumers make healthy choices. FMI research shows that 49 percent of shoppers reported putting more effort into selecting nutritious and health food options during the pandemic. This trend has continued.

Stein said FMI’s Power of Produce 2023 report showed that the produce department grew about 4.8 percent in dollars to a total of $74.5 billion. Although overall volume was down about 4.2 percent, the category still remained strong.

While organic produces sales have decreased and some shoppers are turning to cheaper fresh produce, Stein said shoppers are willing to spend more when it comes to convenience. About 68 percent of shoppers said they would like their store to carry a bigger selection of value-added items, such as pre-cut, pre-washed or packaged salads.

Volpe said COVID-19 was “an enormous challenge” for specialty crop growers of fruits, vegetables and tree nuts. They learned that adaptability, flexibility and a “sort of wide Rolodex” of buyers and sellers is important in being prepared for “the next big shock.” Retailers and foodservice providers across the board are becoming more interested in developing local connections and being able to source locally.

He said that is one reason the availability of local foods has really exploded, with retailers across the U.S. “doing their best to “source, promote and make available whatever can be grown or made locally.” This ties into private labels.

Volpe added that another growing trend is grocery stores emphasizing local partnerships.

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