Why have food prices risen more than non-food prices

Why have food prices risen more than non-food prices?

Food prices are a lot higher than they used to be and every shopper in the U.S. knows it. According to data from the Bureau of Labor Statistics, food prices rose significantly between 2019 and 2022. Overall food prices increased 13.5% over the 3-year period from 2019-2022. More specifically, from December 2019 to December 2022:

Food at home (grocery store food) prices rose 15.6%
Food away from home (restaurant food) prices rose 11.3%

So on average, grocery store food prices saw greater increases than restaurant menu prices from pre-pandemic levels.

Within grocery segments:

Prices for meat rose 16%
Dairy increased 15.1%
Fruits and vegetables climbed 9.3%
Cereals and baked goods were up 16.2%

So across key grocery categories, food prices climbed approximately 9-16% comparing December 2022 costs for items versus their sticker prices back in December 2019 pre-COVID. These inflationary increases outstripped broader consumer price inflation, which rose 8.0% during the 3-year December to December period according to CPI data.

It might be more than just inflation

Inflation is up across the board and it surely is partly to blame for the dramatic rise in grocery bills but it may be more than just inflation. Although many businesses struggled during the Covid-19 pandemic, food manufacturers, as a whole, fared pretty well though they are unlikely to boast about this.

In response to the COVID-19 pandemic, the U.S. Food and Drug Administration (FDA) implemented several temporary policy changes to provide regulatory flexibility for the food industry. These changes were intended to help maintain the food supply chain and meet consumer demand during a time of unprecedented disruption. Key changes to food regulations during the COVID-19 pandemic included

Relaxed ingredient labeling requirements: The FDA allowed manufacturers to make minor changes to product ingredients without updating the ingredient list on the packaged food. This was done to help manufacturers avoid supply chain disruptions and continue producing food even if they were unable to obtain certain ingredients.

Waived routine on-site inspections: The FDA shifted to a risk-based approach to inspections, focusing on high-risk facilities and relying more on reviewing company documents and records to ensure safety. This was done to protect FDA inspectors from potential exposure to COVID-19 and to allow them to focus on more critical issues.

Expedited approval for new products: The FDA streamlined its review process for new food and beverage products, including those related to COVID-19, to help bring new products to market more quickly.

Policy Regarding Enforcement of 21 CFR Part 118 (the Egg Safety Rule) During the COVID-19 Public Health Emergency – This guidance provided temporary flexibility to the egg industry

Policy During the COVID-19 Public Health Emergency Regarding the Qualified Exemption from the Standards for the Growing, Harvesting, Packing, and Holding of Produce for Human Consumption – This policy provided temporary flexibility for certain farms subject to the Produce Safety Rule regarding eligibility criteria for the qualified exemption

Returning Refrigerated Transport Vehicles and Refrigerated Storage Units to Food Uses After Using Them to Preserve Human Remains During the COVID-19 Pandemic – This policy provided temporary flexibility for returning refrigerated transport vehicles and refrigerated storage units to food uses after using them to preserve human remains during the pandemic

Policy Regarding Preventive Controls and FSVP Food Supplier Verification Onsite Audit Requirements Due to COVID-19 – This guidance clarified how the policies apply to importers of dietary supplements

The FDA’s temporary policy changes during the COVID-19 pandemic were aimed at striking a balance between protecting public health and ensuring a stable food supply. While the looser regulations may have raised some concerns about food safety, the narrative held that the changes were necessary to address the unique challenges posed by the pandemic. But the changes that were implemented were supposed to be temporary. As 2023 comes to a close – and most of the drastic pandemic measures are behind us – not all of these “temporary” policy changes have been reversed.

Some claim that major food manufacturers used the supply chain disruptions, the lax regulatory environment and overall inventory fears as opportunities to bolster profit margins through excessive price increases not fully justified by underlying cost escalations. After all, as food prices climbed 13.5% over those 3 years, non-food item prices saw an increase of around 6.6%.

If you thought that food manufacturers may have boosted prices in order to fend off bankruptcy you might be surprised. Despite facing inflationary and other economic pressures, most major US food manufacturers remain financially healthy and well-positioned for longer-term success:

Food manufacturers achieved record revenue and earnings growth in 2021 as price increases rolled through while costs lagged. Margins expanded substantially with operating profits up 15-25% across most categories.
Even though they faced pressures in 2022, top line sales still grew around 5-10% for leaders, according to Credit Suisse analysis.
Categories like snacks, dairy, meat, and frozen foods saw strong demand from at-home consumption trends enduring post-pandemic. This bolstered sales for giants like General Mills, Hormel, Kellogg’s and Conagra.

Being big helps…a lot

Large food manufacturers can leverage scale advantages, multi-channel distribution strength, brand equity and pricing power to help them navigate turbulence – from sourcing substitutions to productivity enhancements to smooth future-buying commodity hedges. In short, large manufacturers can maintain profitability and market share, even in challenging economic environments. Their capacity to absorb higher costs and adapt quickly to changing market dynamics often sets them apart from smaller competitors, who may lack the resources or infrastructure to respond as effectively to similar pressures. And large players are better positioned to weather the storms of market volatility and supply chain disruptions.

Supply chains buckled, uncertainty ruled the day and consumer demand whipsawed early in the COVID-19 pandemic. Did loosened regulations and consumers told that they must shelter in to “flatten the curve” afford food manufacturers useful cover to enact price increases that stretched beyond documented inflationary pressures?

Many producers defended these cumulative double-digit price hikes as necessary reactions to crisis-fueled cost escalations plus shifts in product mixes. However, SEC filings reveal several processed food giants generated all-time high gross and operating profit margins during 2021 despite extolling external cost headwinds publicly as price drivers.

For example, large players like Mondelez, General Mills and Kellogg’s reported full year earnings growth exceeding sales gains, pointing to expanding profitability cushions directly counter to internal inflation squeeze narratives. This background exposes key motivations as at least partially opportunistic – seizing on pandemic instability as intellectual air-cover to aggressively lift prices while securing windfall gains before consumer resistance or private label diversion might curb pricing power.

In addition to the bevy of regulatory changes outlined above, the FDA allowed host of temporary supplier substitutions, additive specification changes, shifting pack sizes and loosened labeling requirements at pandemic peak in 2020. Brands leveraged altered rules to redistribute SKUs and formats in ways that masked effective per-unit prices. Mandated lock downs introduced the at-home dining trend that benefited center aisle staples allowing leading manufacturers to capitalize on the unique moment to effectively transfer margin upside to shareholders after years of competing primarily on cost containment.

Let’s face it, it’s uncommon to see a reversal or decrease in grocery prices once they’ve escalated. With persistent high inflation, the prospect of price reductions seems unlikely. In response to these pressures, food manufacturers often opt for ‘shrinkflation’ and other tactics long before they lower prices. As Yogi Berra famously quipped, ‘Predictions are hard, especially about the future.’ It’s anyone’s guess when American consumers will see relief. In the meantime, we all need to eat.

This report was published in November, 2023