The 4 Real Reasons the Cost of Food Remains High
A basket of groceries that would have cost $100 in December 2019 now runs nearly $126. Take a look at four explanations for higher prices.
Image source: Getty Images
The good news is that inflation continues to cool. According to S&P Global, inflation has fallen markedly this month, with the latest price data signaling that inflation will fall below the 2% target set by the Federal Reserve in the near future.
If prices are coming down across the board, why is it that the average American household is still spending so much money at the grocery store? Where is the disconnect? While there's no single reason the cost of food remains high, here are four factors impacting prices -- and your personal finances.
1. Pandemic-era demand
It all began with pandemic-related demand. Speaking with Vox, Gregory Daco, chief economist at EY-Parthenon, explained that demand jumped as people stocked up on food from the grocery store.
With greater demand came supply shortages, which led to higher prices. But that was nearly four years ago. Michigan State University Associate Professor David Ortega said pandemic-era supply chain disruptions lingered. They included:
- Gas prices increased, making it more expensive for farmers and retailers to transport food across the country.
- Growing costs increased. For example, farmers faced higher prices for necessary supplies like fertilizer.
- Worker shortages meant businesses were forced to pay more for labor.
Price increases therefore made their way to consumers through higher prices at the grocery store.
2. War
The global food supply was hard hit when Russia invaded Ukraine in February 2022. Agricultural products are Ukraine's most important export, with food products like corn, wheat, sunflower oil, and barley accounting for 41% of the country's overall exports. While the Ukrainians have managed to continue some exports, the situation remains dicey enough to impact the global food supply.
It is feared that another war -- this one between Israel and Hamas -- could put another kink in the food supply. If the conflict spreads to neighboring regions, there is likely to be an increase in energy and fertilizer prices, triggering inflation across a range of products, including food.
While the Israel and Hamas conflict has not yet spread, fears that it may could be enough to impact prices.
3. Climate issues
According to the World Economic Forum, climate change is causing extreme weather, ranging from heatwaves and droughts to storms and floods. Here are three examples of how climate change ultimately impacts American checking accounts:
- Extreme drought in the Mediterranean damaged olive trees and led to a poor crop. As a result, olive oil prices have hit an all-time high.
- A mix of drought and flooding in Italy, Thailand, India, and California has played havoc on the rice crop, impacting rice prices worldwide.
- Drought conditions in the American Midwest have corn and soybean growers concerned about yields. At the same time, Argentina has declared a state of emergency and agricultural disaster across regions growing wheat, soybean, and corn.
4. Manufacturer greed
According to food industry experts, the circumstances of the last few years have given food makers the cover they need to hike prices more than necessary. In charging more, manufacturers have boosted their profits and undoubtedly boosted executive bonuses.
While it is true that manufacturing costs have increased -- thanks to factors like increased transportation costs, packaging, and wages -- Mark Lang, an associate professor of marketing at the University of Tampa, told CNN, "They are, to me, absolutely profit taking."
Lang added that companies are maintaining their elevated prices, or even increasing them, at a time when Americans are struggling to pay for food.
At the beginning of the pandemic, as prices for everything from hand sanitizer to auto insurance began to increase, food manufacturers were able to raise their prices, knowing it would take a while for consumers to realize prices had increased.
No one involved in the decision-making appears to feel bad. For example, here's how two top executives responded to the question of higher prices:
- When asked how Conagra was able to raise its prices without losing sales, CEO Sean Connolly said that pricing was "just too low" pre-pandemic. He went on to say that Conagra has been able to illustrate that "consumers will welcome a $4.50 unit" because at that price, a frozen meal is still a good value.
- Coca-Cola CEO James Quincey said, "We've earned the right to price with the consumers. If it can demonstrate that people will pay more for Coke, it can convince retailers that higher prices will be good for them, too.
Company CEOs made no mention of how higher prices impact the average consumer, who is forced to draw money from their savings account to cover the cost of groceries or cut back drastically on the amount of food they buy.
For consumers, the reality is this: The same basket of groceries that would have cost $100 in December 2019 will now set them back $125.51. Given the increase, we're all looking for ways to save. Here are a couple of ideas that may come in handy:
- The Flipp app can help you save money with every trip to the grocery store.
- If you're not sure how you're going to pay for food, you have options to explore.
Ideally, food prices will cool down as inflation continues to fall. In the meantime, we'll all have to look out for ourselves and our neighbors.
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