What Is Driving the Increase in Food Prices? By Jayson L. Lusk Purdue University

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The Issue:

With the onset of the pandemic in March 2020, many consumers experienced, for the first time in their lifetimes, empty grocery store shelves. More than a year into the pandemic, they are facing another unfamiliar trend when it comes to accessing food: notably higher prices. Increases in wages in the food sector, rising agricultural commodity prices, transportation bottlenecks, and strong consumer demand have led to the highest annual grocery price increases in a decade and the highest annual restaurant price increases since the early 1980s.

Consumers are facing the highest annual grocery price increases in a decade and the highest annual restaurant price increases since the early 1980s.

The Facts:

  • Food prices have risen at a faster average rate since the onset of the pandemic than they did over the prior decade. Since April 2020, food prices have increased an average of 3.6% for food bought for at-home consumption and 3.9% for food away-from-home on a monthly year-over-year basis. This is a marked increase from the decade leading up to the pandemic when prices increased an average of 1.2% for food bought for at-home consumption and 2.5% for food away-from-home on a monthly year-over-year basis (see chart).
  • Food prices have been extraordinarily volatile throughout the pandemic. Prices for food at grocery stores experienced the largest monthly increase since the 1970s from March 2020 to April 2020 when the closure of restaurants and uncertainty about future mobility and availability led consumers to rush to load their pantries. Worker illnesses in the meatpacking sector shortly followed, closing down nearly 40% of total national processing capacity at one point in May 2020. Retail beef and pork prices skyrocketed as a result. Eventually, pressure on food prices waned during the summer of 2021 as the initial disruptions to the food supply chain subsided. But a confluence of events has emerged to accelerate the pace of food price increases in recent months. As a result, at-home food prices are up 9.3% and prices of food away-from-home are up 8.5% in October 2021 relative to January 2020.
  • Meat price changes have been a primary driver of overall food price increases. Changes in meat prices have a large influence in the price indices because consumers spend a relatively high share of their food budget on these items. Beef, pork, and chicken prices are respectively 26.2%, 19.2%, and 14.8% higher in October 2021 than prior to the pandemic in January 2020. Indeed, prices for some meat items have reached the highest levels recorded even after adjusting for overall inflation. The retail price of bacon, for example, was $7.31/lb in October 2020, 36% higher in inflation-adjusted terms than in October 1980. The meat price increases were initially caused by disruptions in supply when packing plants shuttered after workers contracted COVID19. Packing has fully resumed, but there remain extra costs from socially distanced workers and the addition of personal protective equipment. In addition, livestock and poultry feed prices have significantly increased as discussed in more detail below. These increased supply costs have occurred as domestic and foreign consumer demand for U.S. meat has also been strong.
  • Agricultural commodity prices have increased. For every dollar consumers spend on food, about 14 cents reflect the cost of the agricultural commodities at the farm level. Prices for raw agricultural commodities like corn, wheat, rice, and soybeans have risen since the start of the pandemic. The United Nations, Food and Agriculture Organization, Food Price Index, which tracks global prices of commodities used in making food, is up 30% in October 2021 relative to pre-pandemic levels in January 2020. Commodity prices have been rising because of impacts on supply from adverse weather conditions in major crop growing regions (e.g., derecho in the United States’ Midwest in Summer of 2020; drought in Argentina, Brazil, and in the Western U.S. in 2021) and from higher input costs like fertilizer and herbicides.
  • Heightened consumer demand has contributed to food price increases. Although spending on food at restaurants took a hit in the wake of the pandemic, it has completely recovered. In fact, spending on food at home was up 21% and food away from home up 24% in August 2021 relative to pre-pandemic January 2020. Policy and monetary factors have likely played a role in the retail food price run-up. Three rounds of COVID Economic Impact Payments to households provided extra income for households, and policy changes to programs like the Supplemental Nutrition Assistance Program (aka “food stamps) expanded the ability of low-income households to more easily buy food online. Beyond domestic factors, strong international demand has contributed to some of the retail price pressures. For example, U.S. beef exports were up about 48% in August 2021 relative to August 2020 and Chinese purchases of some U.S. agricultural commodities increased significantly in the latter half of 2020 and early 2021, boosting demand, and pulling up prices.
  • Wage rates in the food industry have significantly risen over the course of the pandemic and these higher wages get reflected in higher food prices. The average weekly earnings of production and non-supervisory employees working in food manufacturing have increased 11.1% from before the pandemic in January 2020 to September 2021. Specifically in animal slaughtering and processing, weekly earnings have increased 19.1% over this same time period. Wages for non-supervisory workers in food retail (i.e., grocery) have increased 8.5% and for workers in food service (i.e., restaurants) by 15.5% since the start of the pandemic. Despite the higher earnings, employment in these sectors has not changed much, and for most of these industries, has in fact fallen over the course of the pandemic. Challenges finding workers to run businesses close to capacity in times of high demand have also contributed to food price increases. The factors causing the shortage in labor are debated, but relate to fear over contracting COVID-19, lack of childcare or school operations during COVID-19, extension of unemployment benefits and COVID Payments supplanting earned income, and reconsideration of working norms.
  • Food isn’t necessarily less affordable — especially when considering a longer horizon. Looking only at changes in the price of food might be misleading as an indication of food affordability. A more relevant question is whether consumers’ purchasing power has changed. To answer this, one must compare changes in the price of food to changes in income. To obtain a measure of whether food is, in fact, more expensive today than in the past, I use data on median weekly earnings for people employed full time and compare it to the average price of selected food items. Back in 1980, a worker earning the median weekly salary would have to work about 175 minutes (almost 3 hours) to earn enough money to buy a 20-pound turkey. By 2019, the median worker only had to work about 80 minutes (1 hour 15 minutes) to buy a 20-pound turkey because there have been incredible efficiency improvements in turkey production over this time. The change in affordability varies by product. In 1991, a worker earning the median salary would have to work about 170 minutes to earn enough to buy a 10-pound ham. Today, the median-salaried worker only has to work 113 minutes to buy a 10-pound ham. By these measures, bread and potatoes were more expensive in the years 2008 to 2012 than they are today while beef steak is expensive today relative to the past. (The most recent data suggests a worker making the median wage would have to work about 102 minutes to earn enough to buy 4 pounds of beef sirloin steak at retail).

What this Means:

When calculating rates of inflation, economists often remove food because food prices tend to be more volatile than prices of many other goods in the economy. However, we should be interested in food prices precisely because they can be volatile. Because food is a necessity, changes in the price of food have the potential to immediately and directly affect household well-being as households must re-allocate their budgets to accommodate food price rises. U.S. households in the lowest 20% of income spend 10.8% of their total budget on food at grocery. By contrast, households in the highest 20% of income spend 6.8% of their total budget on food at grocery. As a result, food price increases have disproportionately negative impacts on the poor. Whether the current price increases are transitory or longer-lasting remains to be seen, but the current trajectory of food prices, and price volatility, has led to numerous and active policy discussions about resiliency of food supply chains, with focus on issues like industry concentration, just-in-time inventory, local and regional production, and international trade in food, which have the potential to influence the prices we pay for many years ahead.