Grocery inflation continues to slow, but the trend may be short lived as the Iran conflict continues to drive up energy and fertilizer costs, which likely will have medium- and long-term impacts on food prices at shelf, industry stakeholders warn.
Prices for food at home fell 0.2% in March over the previous month, marking a reversal from the previous three months when it ticked up 0.4% in February, 0.2% in January and 0.6% in December, the US Labor Department reported late last week.
This was offset by a 0.2% increase in the price for food away from home, including restaurants, which has steadily increased in recent months, including 0.3% in February, 0.1% in January and 0.7% in December.
As a result, food prices overall were flat in March over the previous month, but still up 2.7% over the past year. Food at home was up 1.9% year over year and food away from home was up 3.8% year over year.
The calm before the storm
The “decrease in grocery inflation should be welcome news for consumers following notable increases in recent months,” said Andy Harig, VP of tax, trade, sustainability and policy development at FMI – The Food Industry Association.
However, he cautioned, “while these numbers are encouraging, recent instability in global energy markets is contributing to rising production costs across the food supply chain and could put upward pressure on grocery prices going forward.”
For example, he said, “fuel is a critical input at every stage of the food system – from powering farm equipment to processing, packaging and transporting products to store shelves. As energy prices increase, the costs associated with producing and delivering food also rise.”
The energy index rose a whopping 10.9% in March, according to the Bureau of Labor Statistics. It noted, this was “led by a 21.2% increase gasoline, which accounted for nearly three-quarters of the monthly all items increase,” which is up 0.9% month over month on a seasonally adjusted basis in March.
The increase can be attributed in large part to Iran’s closure of the Strait of Hormuz in response to US and Israel attacks. The closure has stalled shipping and caused crude oil and gasoline prices to surge. It has also created fertilizer bottlenecks just as many North American farmers are starting their planting season.
Consumers are changing how the shop
Together these likely will increase food prices at the shelf in the medium- and long-term – a prediction that has many Americans changing their spending habits already.
New data from Omnisend shows that more than 80% of consumers are or anticipate shifting their shopping in anticipation of higher prices due to the Iran war.
“Consumers don’t need to fully understand geopolitics to feel its impact. They see it every time they fill up their car or check out at the grocery store,” Marty Bauer, ecommerce expert at Omnispend, said in a statement.
“What is striking is how quickly this uncertainty translates into action,” he added. “People aren’t waiting for prices to rise further – they are already cutting back, delaying purchase and becoming far more selective about where they spend.”
For example, Omnisend data shows 45% of Americans are cutting non-essential spending, 35% are comparing prices more and nearly 48% are buying earlier to avoid expected price increases, especially of pantry staples (58%) and household essentials (57%).
How high will food prices go?
The impact from the war likely will throw a wrench in US Department of Agriculture predictions that food inflation – at least for groceries – would level out in 2026.
Before the war, USDA predicted food inflation in 2026 would hold stead at about 3% –although it cautioned it could increase to 6% based on the confidence interval.
The 2.7% year-over-year increase for food reported by BLS in March is close to USDA’s 3% projection, leaving little wiggle room as the war drags on and in the case of other unexpected factors given the year is not yet at the half way point.
Overall, inflation is up 3.3% for all items before seasonal adjustment for the past 12 months, according to BLS. This is on top of a 2.4% gain reported in February and the highest in two years.