Can food prices fall?
Posted by: Paul Donovan
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- As a high frequency purchase, food prices are a very visible form of inflation. Food price inflation has recently slowed, but food price levels are still significantly higher than in the past. Could this change?
- Consumers mainly pay for what happens after food leaves the farm. For example, UK farmers received about a third of the retail price of milk in recent months. Farmers’ share of processed food prices will be even less. Therefore, if costs after the farm gate fall, prices could fall. Labor costs are one possible saving (every time you use a self-service checkout, you are working for the retailer for free—lowering their costs).
- An alternative is squeezing retailers’ profit margins. Profit-led inflation was about rising profit margins (US retailers’ profit share of retail GDP rose from 12% in 2019 to 21% today). Profit-led inflation stopped when margins stopped rising, but that does not means prices fall. If profit margins were cut, that might be passed to consumers as price cuts.
- The final option is consumers forget prices are high. Consumers tend to hold a “fair” price in their mind for eighteen months or so. Eventually, our brains reset and we accept the current price as being “fair.” Thus, consumers eventually forget that price levels have risen.
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