Slower inflation growth in August sparks optimism, but likely won’t impact grocery prices soon

14-Sep-2021 - Last updated on 14-Sep-2021 at 17:21 GMT

Source: Getty/Galina Sandalova

Related tags Inflation

While inflation in August was still more than double the Federal Reserve’s 2% long-term target, its growth rate slowed for the first time in eight months – sparking optimism in some policy makers that the economy is healing.

However, grocery shoppers are unlikely to see relief on store shelves any time soon as many price increases negotiated between retailers and CPG manufacturers to offset higher input costs are just now starting to pass through to shoppers and likely will continue to appear through 2022.

The Bureau of Labor Statistics revealed Sept. 14 that the consumer-price index in August rose a seasonally adjusted 0.3% over the prior month, which was lower than the expected 0.4% economists polled by The Wall Street Journal estimated, and the slowest it has been since January.

The CPI has steadily increased month-over-month between January, the last time it was at 0.3%, and April when it reached 0.8%. After a brief reprieve in May, when the increase fell back to a still high 0.6%, before shooting up to its highest point in a year in June at 0.9%.

The slowdown correlates with a small slowdown in overall inflation, which rose 5.3% for the 12 months ending in August. According to the US Labor Department, this is the first sign of slowing since October 2020, when inflation was 1.2% higher than the previous October. Since then, inflation has held steady or grown, with a sharp increase beginning in March 2021 when it jumped to 2.6% over the prior year, followed by 4.2% in April, 5% in May, 5.4% in June and July and finally reversing course to 5.3% last month.

While it is still too soon to tell if this is the start of a long-term trend, The Federal Reserve is optimistic and predicts that the rate of inflation will fall to its target of 2% in 2022 as labor and material shortages triggered by the pandemic ease alongside the need to raise prices to offset higher inputs.

Beef leads food inflation

A closer look at the consumer price index for food at home reflects a similar trend, with growth slowing to 0.4% in August compared to 0.7% in July and 0.8% in June over the prior 12-month periods.

Of the food at home indexes, the beef index increased the most at 1.7% over the month, followed a 1% increase for nonalcoholic beverages, and 0.7% for meats, poultry, fish and eggs. Other food at home rose .06% in August.

The index for dairy and related products fell 1% in August after climbing the four prior months, and the index for cereal and bakery products held steady after increasing 1.2% in July, according to the BLS.

The rapid rise of meat prices has caught the attention of the White House and become a political flash point.

According to the White House, meat constitutes half of food at home price increases with the price of beef raising 14%, pork 12.1% and poultry 6.6% since 2020. For context, the price of fruit and vegetables climbed 3%, cereal about 1.5% and frozen prepared foods about 1.5% since December 2020.

While the White House acknowledges that “factors like increased consumer demand have played a role [in higher meat prices], the price increases are also driven by a lack of competition at a key bottleneck point in the meat supply chain: meat-processing.”

The White House goes on to note in a Sept. 8 statement that “just four large conglomerates control the majority of the market for each of these three products [beef, pork and poultry], and the data show that these companies have been raising prices while generating record profits during the pandemic.”

In response, “the Biden-Harris Administration is taking bold action to enforce the antitrust laws, boost competition in meat-processing and push back on pandemic profiteering that is hurting consumers, farmers and ranchers across the country,” the White House said in the statement.

Among these actions is an ongoing joint investigation with the Justice Department into price-fixing allegations in the chicken-processing industry, which has resulted in one guilty plea and other indictments. In addition, the US Department of Labor promises tougher enforcement of the Packers and Stockyards Act and increased transparency into what beef processors pay and how meat is labeled.

Additional price increases likely are on the horizon

Even though overall inflation and the consumer price index for all at home food dropped in August, any relief manufacturers feel from lower input costs likely will not be reflected immediately in store prices.

According to a recently released report from USDA, the price of food consumed at home is expected to increase between 2.5 and 3.5% in 2021 over 2020. This trend likely will continue in 2022 with at-home prices projected to increase an additional 1.5 to 2.5%, the report adds.

Several large CPG firms and retailers acknowledge that additional rounds of price increases may be necessary in the coming months, including Coca-Cola Co., Nestle, Albertsons, General Mills, Kellogg and others.

Nearly a third of consumers consider themselves price-sensitive shoppers

While much of the price increases implemented in the past year and in the coming months are necessary to offset inflation, they come at a time when consumers are increasingly price-sensitive – meaning brands and retailers will need to explore other ways to maintain margins and consumer access.

According to recent research by Valassis, more consumers are price-conscious now than last year with 31% considering themselves as such compared to 23% in 2020.

To avoid losing market share due to higher prices, many CPG companies are exploring a variety of cost management options, including buying in bulk when possible, reformulating to avoid more expensive or harder to find ingredients, and price pack architecture among other strategies.