Economy

Will food prices stop rising rapidly? Many companies say yes.

Ileo8jst

Few prices are as visible to Americans as those they encounter at the grocery store or drive-through, which is why two years of rapid food inflation have been a major drag on American households and the Biden administration .

Shoppers have only slowly regained confidence in the state of the economy as they pay more to fill their shopping carts, and President Biden has made a habit of shaming food companies — even going so far as to film a video. Super Bowl Sunday video criticizing snack producers for their “rip-off” prices.

But today, the inflation trend in the grocery and restaurant sectors appears poised to change.

After months of rapid increases, the cost of food at home climbed at a significantly slower pace in January. And from packaged food suppliers to restaurant chains, food companies are reporting that they are no longer raising prices as sharply. In some cases, this is because consumers are finally resisting price increases after years of spending through them. In others, it’s because the prices companies pay for inputs like packaging and labor are no longer rising as sharply.

Even if food inflation slows, that doesn’t mean your grocery bill or restaurant check will go down: It just means it will stop rising so quickly. Most companies are considering small price increases rather than outright price drops. Still, when it comes to whether rapidly rising food and restaurant prices are behind us, what executives are telling investors gives some reason for hope.

Executives have found in recent months that they can only raise prices up to a certain level before consumers give up.

The soda and snack maker PepsiCo had increased its prices by two-digit percentages for seven consecutive quarters, and even though that streak ended at the end of 2023, PepsiCo still raised prices by 9% in the final months of the year.

But all those price increases on soda and chips have started to take effect. The company recently released a surprise drop in sales.

Ramon Laguarta, CEO of PepsiCo, said at a recent earnings call that the company would be less likely to raise prices beyond “normal price levels” – around 2-3% per year. The company is seeing more moderate cost increases on ingredients and is more focused on maintaining sales, he said.

James Quincey, the chief executive of Coca-Cola, explained during a recent earnings call that the company has seen a stark divide among U.S. customers: some are struggling financially and facing a “real squeeze in purchasing power,” while others “still have a lot of money, a lot purchasing power” to spend on lactose-free milk and protein shakes.

Walmart, the nation’s largest retailer, reported strong sales in the United States in the fourth quarter, in part because more higher-income households turned to the value chain for shopping.

“We continue to see a resilient, but value-seeking customer,” Doug McMillon, Walmart’s chief executive, said during an earnings conference call Tuesday. I noticed that the prices of food and consumable products were still “slightly” higher than a year ago.

“Prices are lower than a year ago in places like eggs, apples and deli snacks, but higher in other places, like asparagus and blackberries,” he said. declared.

Some companies appear to be following the rest of the economy toward more moderate price changes. Headline inflation, as measured by the consumer price index, peaked at 9.1% in the summer of 2022, but slowed to just 3.1% earlier this year, while prices food products like beef, cereals and certain types of dairy products have become more flexible.

“Our prices generally decline as inflation returns to what I would call more normal levels,” said Ian Borden, McDonald’s chief financial officer. on appeal with investors. (McDonald’s executives also noted that they were seeing some lower-income customers spending less per visit.)

Shake Shack, the burger and ice cream chain, plans to raise prices 2.5% this year — a return to the type of increases that were normal before the pandemic, said Katie Fogertey, the company’s chief financial officer , during a press conference. recent earnings call.

But she noted that some stores would have to raise their prices more to offset the increased costs. This is especially true in markets where workers are hard to find and larger price increases are needed to “offset inflationary pressures on wages,” she said.

Such comments underline an important point. Many companies have taken advantage of inflation to boost profits, but in recent years, some of the price increases at grocery stores and restaurants have been intended to cover higher costs. Salaries were rising rapidly in the hospitality and retail sectors, and key ingredients were expensive due to supply chain problems, Russia’s invasion of Ukraine and bouts of bird flu.

Companies usually at least try to raise prices when the cost of doing business increases to avoid losing profits. But as pressures on wages and input costs begin to fade, companies can stop raising prices aggressively without risking harm to their bottom lines.

Of course, there is a way to cover higher costs without raising prices: Companies can improve productivity, so each employee can stock more shelves, prepare more burgers, or wait more tables. That’s part of what Wendy’s does.

The fast-food chain is rolling out digital menus, hoping they will provide “immediate benefits in order accuracy, improve the crew experience” and enable sales growth, said Kirk Tanner, chief executive officer of the company. a recent earnings call.

Wendy’s also plans to try “dynamic pricing,” he said, using technology to change prices to meet consumer demand. Another company executive suggested the company expected “low single-digit prices” this year.

Taken together, the signs suggest that grocery and restaurant inflation is likely to prove more moderate in 2024 than it was in the previous year. previous three years.

Many feed-related input costs are decreasing or increasing less aggressively. Wage gains remain high in the restaurant industry, but they are returning to normal. And consumers are starting to object to the steep price increases that companies used to increase profit margins.

Michael Swanson, chief agricultural economist at Wells Fargo, expects food inflation to ease to 0.5 percent this year – “much slower than it has been” – although restaurant inflation could remain higher as people continue to open their wallets to eat out.

Even there, he said, “the trend will decline.”

Jordan Holman reports contributed.