Sticky Food Prices

When economists speak, we do not set out to be controversial. But some phrases catch our audience’s attention and invite challenge. Lately, we have raised eyebrows with a simple statement: Inflation is past its peak. Looking across all products, the statement is true, but the average obscures some hot categories. As our listeners have been quick to rebut, food prices continue to strain household budgets and keep inflation top of mind.

Food prices have been volatile ever since the initial COVID lockdowns. It was the first category to inflate as suppliers struggled to match the demand shift away from restaurants and toward grocery stores, and as workers in food production facilities fell ill. Food broadly followed all prices up as inflation took hold in the course of 2021. In the second half of 2022, while headline inflation started to correct, food prices kept climbing.

Some of the run-up reflects the systemic challenges battering the economy in recent years. On the production side, farms require labor, which has been in short supply. Immigration flows fell in the pandemic, especially the temporary work permits that allow migrant laborers during peak harvest seasons. Farm wage costs have risen in tandem with all other frontline occupations.

Farms rely on fertilizer, much of which takes petroleum as an input. Oil prices rose during the 2021 reopening and surged in the wake of the Ukraine invasion, leaving farms paying more for these vital inputs. Reduced fertilizer exports from both Russia and Ukraine amplified the price swings. The producer price index of agricultural chemicals has settled 67% above its March 2020 level. And of course, higher fuel prices increase the cost to transport food from farms to retailers.

Higher interest rates have weighed on the agricultural sectors. Many farms routinely rely on operating loans to fund planting and cultivation, which are repaid with the proceeds from their harvest. Higher short-term funding costs have pushed up interest rates on these loans.