American households are now spending a greater portion of their income on food than they have in the past 30 years, a trend exacerbated by persistent high costs that have led to increased prices at both grocery stores and restaurants. President Biden is taking the food industry to task for responding to up-line cost pressure by “shrinkflation” or reducing the goods or services per unit. However, industry leaders are stumped to find another way to preserve their profit.
Eating Out and Grocery Shopping Up 5.1% and 1.2% respectively
Despite a general easing of inflation, eating out and grocery shopping remain expensive, with restaurant prices up 5.1% and grocery costs up 1.2% compared to the previous year, according to the U.S. Department of Labor.
Food and Restaurant Sectors Point to Rising Labor and Ingredient Costs
Executives from the food and restaurant sectors attribute the ongoing price hikes to rising labor costs and the escalating prices of certain ingredients, like cocoa, with no immediate relief in sight.
Inflation Draws Comparison to Stagflation of 1970s
This inflationary trend mirrors the situation three decades ago, following a period of significant inflation in the 1970s when food expenditures constituted a similar percentage of disposable personal income.
Price of Food Had Sustained Increase Across the 1970s
During the 1970s, the United States experienced a period of significant inflation across the board, with the price of food and energy being notably affected, leading economists to reconsider the actions of the Fed and other central banks.
1970s Oil Crisis, Global Commodity Prices, Increased Demand
The Great Inflation of the 1970s was characterized by several economic challenges, including the oil crisis, which led to higher production and transportation costs that were passed on to consumers, including in the food sector.
U.S. Has Not Yet Seen Evidence of Wage-Price Spiral as in 1970s
Several factors contributed to the inflation in food prices during the 1970s, including oil prices and the cost of transporting goods. Global commodity prices fluctuated greatly due to poor harvests, increased demand for grains and meat, and a wage-price spiral.
Modern Inflation from Stimulus, Low Interest Rates Before 2023, Supply Disruption
The circumstances are different today, with inflation and market disruptions due to government response to the Covid-19 pandemic, prolonged historically low interest rates, and business and manufacturing closures. Different countries dealt with the pandemic in different ways, leading to shortages of many commodities and technologies critical for keeping up with Americans’ demands for goods.
Consumers Changing Behavior, Dining Out Less, Buying Generic Brands, Shopping Sales
Consumers are adapting by dining out less frequently, opting for less expensive brands at the grocery store, and taking advantage of promotions. Cash-strapped consumers are seeking alternatives to everyday essentials.
Food Manufacturers and Restaurants Feeling the Strain of Americans’ Spending Cutbacks
However, the impact on sales for food manufacturers and restaurant operators is becoming evident. Brand-name consumer goods are feeling the pinch as consumers reach for store-brand goods, which are typically cheaper.
While Some Commodities Deflating, Other Costs Remain Notably High
Despite some commodities becoming cheaper, other costs remain high, such as labor, contributing to a broader trend of price increases across various sectors, further inflating company profits.
Biden Responds to Inflation by Chiding Manufacturers for Skimping on Product Sizes
The issue of food inflation has caught the attention of President Biden, who criticized food manufacturers for “shrinkflation” — reducing product sizes while maintaining prices — a move he described as a “rip-off.”
Food Companies and Restaurants Need Relief from Economic Pressure
Food companies and restaurants have been forced to adapt in response to economic pressures, relying on efforts to improve efficiency and adjust pricing strategies to cope with increased costs.
Labor and Staffing Costs Eat into Profits of Businesses
Labor shortages, an aging workforce, staffing costs (kept high to prevent turnover), and procurement of increasingly costly ingredients are some of the greatest challenges facing businesses in 2023 and 2024.
Looking for Sustainable Practices to Avoid Same Problems in Future
Producers and industry analysts, concerned about the long-term impacts of the current economic problems, are focused on how to use this experience to better prepare for the future. They are looking for sustainability and procurement solutions in case another crisis hits the country as the pandemic did, threatening the global supply chain.
