Feeding Discontent

Food prices are dragging down feelings about the economy.

“What goes up, must come down.” That elegant summary of Newton’s second law applies in the physical world, but it does not apply to economics. And that is currently a source of consumer discontent.

In most major economies, inflation is much lower than it was a year ago. The target of 2% is within sight, which should allow interest rates to moderate. Unemployment has not risen much, creating the makings of a soft landing. Asset prices have also been very strong. This combination of outcomes would have been assigned a very low probability a year ago.

Nonetheless, households aren’t at all happy with economic circumstances. Consumer confidence is at low levels in major markets, despite better-than-expected results. Some of the poor sentiment is political, as views about the outlook vary with party affiliation. But some of it is based on markets: supermarkets, not stock markets.

The pandemic affected food prices more than almost any other category. Quarantine forced a shift in distribution from restaurants to grocery stores; illness disrupted processing and distribution. Concerns over food security led to a decline in exports and scant supplies for some commodities.

Other supply shocks piled on. The war in Ukraine hindered shipments of fertilizer used by farmers around the world. An outbreak of avian flu in the United States affected the poultry industry. Across developed markets, grocery prices are about 30% higher than they were at the beginning of 2020. “Shrinkflation,” where product quantities are reduced while prices remain stable, and “skimpflation,” where product quality is reduced, add insult to injury.