The one-two punch of tariffs and bottlenecks for fuel, fertilizer and key commodities due to the ongoing war in Iran are finally hitting grocery prices as anticipated, but the impact is higher than expected as is consumer pullback on spending.
In April, the price for food consumed at home increased 0.7% over the previous month – marking a sharp reversal from March when inflation for food at home cooled 0.2%, according to the Consumer Price Index updated May 12.
The increase was notably higher than the 0.2% month-over-month uptick for food consumed away from home, which has been steadily climbing every month this year, including a monthly increase of 0.2% in March, a 0.3% increase in February and a 0.1% increase in January, according to BLS.
Combined, the increases for food at home and out of home drove up the total food index 3.2% in the past 12 months, which is slightly higher than the 2.9% year-over-year increase for only food consumed at home.
Fallout from geopolitical tensions
The “significant jump in food-at-home inflation” was “expected given global events,” said Andy Harig, vice president of tax, trade, sustainability and policy development with FMI – The Food Industry Association.
He explained, “Food production is energy-intensive, from the field to the shelf to the table. Recent instability and uncertainty in global energy markets are contributing to rising production costs across the food supply chain. Today’s numbers reflect the reality that these dynamics are putting substantial cost pressures on the supply chain and therefore grocery prices.”
These events include Iran’s closure of the Strait of Hormuz in response to US and Israeli attacks has stalled shipping and caused crude oil and gasoline prices to surge. The closure also created fertilizer bottlenecks just as many North American farmers were starting their planting season.
In April, energy prices soared 17.9% year over year, led by a 54.3% increase in fuel oil and a 28.4% increase in gasoline in the period, according to the Labor Department.
Likewise, farm fertilizer prices have spiked since the start of the war. For example, according to analysis by the University of Illinois Urbana-Champaign, fertilizer costs in central Illinois have increased by more than $20 per acre based on April prices compared to six months prior to the conflict.
Having been passed through the supply chain, these higher costs are now showing up on store shelves.
For example, BLS data shows that in April “staples like beef, poultry, fish and eggs rose 1.3%, fruits and vegetables increased 1.7% and dairy products are up 0.8%” over the previous month, Harig said.
He added, even though the hikes were anticipated, they “are understandably frustrating for American families and grocers alike.”
Consumers evaluate value ‘item-by-item’
In response to rising prices and intensifying uncertainty, many shoppers are “running a value calculation on every item, every trip,” said Sean Turner, CTO at Swiftly.
Pointing to recent research by the retail tech and media company, Turner said about 37% of shoppers say they will switch brands if a promotion makes it “worth it,” while 44% are engaging with relevant offers through their loyalty programs and apps.
This shows the impact of higher prices is “not a broad trade-down,” but neither is loyalty “automatic anymore,” Turner said.
Rather, sales are “earned in the moment based on whether the value is clear,” he added.
How do consumers determine ‘value’?
But how do consumers evaluate “value” and whether it is “worth it” to spend more on a known product or trade down to something less expensive?
“The criteria shoppers are using is pretty practical. It comes down to whether a product solves a need in a way that justifies the price. That could be quality, health benefits, convenience or simply a relevant offer that shows up at the right time. Brand awareness still matters, but it doesn’t carry the same weight on its own. If the value isn’t obvious in the moment, shoppers move on,” Turner explained.
He added: “What’s changed is when exactly that decision happens. More of it is happening before the trip, when shoppers are planning and looking at offers. The brands that win are the ones that make that value clear early and show up in a way that feels useful, not generic.”
