Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Reshaping the Pet Food Industry
Transcript
- Lucas: So there's this number that's been stuck in my head since the latest CPI release. The pet food price index is up 8.2 percent year-over-year. That's not just high — it's more than double the overall inflation rate. Luna: Eight point two percent. And I think most people don't realize that pet food has been one of the stickiest categories for inflation. It never really came back down after the 2021-2022 spike. Lucas: Exactly. The Bureau of Labor Statistics data shows that pet food prices are roughly 25 percent higher than they were in early 2021. Meanwhile, overall CPI has moderated a bit — core PCE is hanging around 2.8 percent. But pet food? Still running hot. Luna: And that creates a real tension for households, because pet ownership is still near its pandemic peak. The ASPCA estimates about 70 percent of U.S. households have a pet. So this isn't a niche problem — it's hitting tens of millions of families. Lucas: Right. And the question is: how are people adjusting? Because you can't exactly tell your dog to eat less. Well, you can, but the vet will have a word with you. So what we're seeing is a classic 'trading down' pattern. Luna: Meaning people are moving from premium brands to value brands, or from branded products to private label. Lucas: Exactly. NielsenIQ data shows that private label pet food has gained about three points of market share over the past two years. That might not sound huge, but in a category worth over fifty billion dollars annually, that's real money moving away from the major manufacturers like Nestlé Purina and Mars Petcare. Luna: And those companies are feeling the pressure. Purina's parent company Nestlé reported in their most recent earnings that their pet care segment had lower organic growth in North America, partly due to consumers switching to cheaper options. Lucas: So they're responding. You've seen them introduce more 'affordable premium' lines — things like Purina Pro Plan under a slightly different price point, or smaller package sizes to keep the absolute dollar amount lower. It's the same shrinkflation playbook we've seen in snack foods and paper goods. Luna: But here's where it gets interesting. The emotional bond with pets actually limits how much people will trade down. A lot of owners view their pets as family members — the 'pet parent' mindset. So while they might switch from a super-premium brand to a mid-tier one, they're less likely to go all the way to the cheapest generic. Lucas: That's a great point. And it's supported by some consumer survey data from the American Pet Products Association. They found that about 40 percent of owners said they would rather cut back on their own discretionary spending than downgrade their pet's food. Luna: That's a pretty strong signal. It means the pet food industry has a bit of a buffer — a 'pricing power' that other consumer goods categories don't have. But it's not infinite. Lucas: Right, and the macro environment is testing that. Real GDP growth is at 2.1 percent annualized, which is okay but not booming. The unemployment rate is 4.2 percent, and job openings are still high at 7.6 million according to the latest JOLTS data. So the labor market is tight, but wage growth is running at about 3.5 percent — and pet food inflation is running at more than double that. Luna: So real wages for pet owners are actually declining when it comes to this specific category. That's the stagflation dynamic in microcosm. Lucas: Exactly. And we're seeing that play out in other areas too. The CNBC headline about 'funflation' — the idea that staying in isn't the cost saver it used to be — that's relevant here. Because pet ownership is largely a home-based activity. If your pet's food is getting more expensive and your utility bills are up, that's a double squeeze on the stay-at-home budget. Luna: I want to come back to the manufacturers for a second. Nestlé and Mars dominate the market, but there are also smaller players like Freshpet and The Farmer's Dog — the fresh and refrigerated pet food segment. How are they doing in this environment? Lucas: They're in a tougher spot. Freshpet, for example, reported a loss in their most recent quarter. The refrigerated supply chain is expensive, and they can't raise prices as aggressively because they're already at a premium. So their margins are getting squeezed. Meanwhile, the big guys have scale and can absorb cost pressures better. Luna: That suggests we might see consolidation. Maybe Nestlé or Mars acquires a fresh pet food brand to capture that growing segment. Lucas: Wouldn't surprise me at all. The M&A environment has been quiet because of interest rates, but strategic acquisitions in high-growth niches still happen. And pet food is relatively recession-resilient — people will cut back on dining out before they cut back on their dog's kibble. Luna: Speaking of cutting back — I've been thinking about something. If a decent chunk of listeners has stuck with us through this whole conversation, maybe they find this kind of economic breakdown useful. And you know, this show has no ads, no sponsors, nothing like that. It's just us, and a small group of listeners who chip in to keep it going. Lucas: Yeah, it's a pretty straightforward model. If walking through the economy with us has made something click, there's a buy me a coffee at buy me a coffee dot com slash fexingo. It's not a big ask — just a way for people who get value out of the show to help us keep it ad-free. Luna: Right. And honestly, it's what lets us dig into weird niches like pet food inflation. So if that's your kind of thing, consider it. Otherwise, back to the kibble wars. Lucas: So where does this go from here? I think the key variable is the labor market. If unemployment stays low and job openings remain high, consumers will have enough income to absorb higher pet food prices. But if we see a softening — if the JOLTS number drops below seven million — then trading down could accelerate. Luna: And that would hit the premium brands hardest. Especially the fresh and natural segments that rely on a higher-income customer base. Lucas: Right. The other thing to watch is commodity costs. Corn, wheat, and meat prices — the main inputs for pet food — have been volatile. If they spike again, manufacturers will have to either raise prices or accept thinner margins. Luna: And we know from the China producer price data that global input costs are still rising. China's PPI hit a near four-year high in June. That will eventually feed through to U.S. manufacturers. Lucas: So there's a lot of pressure on the industry. But from a consumer standpoint, the advice is pretty clear: if you're trying to save on pet food without sacrificing quality, look at store brands. The major retailers like Costco, Target, and Walmart have their own lines that are often made by the same manufacturers as the national brands. Luna: And check the ingredients list. Sometimes the private label product is nearly identical but costs 20 percent less. Lucas: Exactly. It's one of those rare cases where the economic data actually points to a specific consumer strategy. The CPI numbers tell you where the inflation is, and the market share data tells you where the smart money is moving. Luna: So to bring it back to the stagflation theme — we've got high pet food inflation, moderate GDP growth, and a labor market that's still okay but showing cracks. Sound familiar? Lucas: It's the 1970s all over again, just with better ingredients lists. But the economic dynamics are genuinely similar. And like the 70s, this isn't going to resolve overnight. Pet food prices will likely stay elevated for at least another year. Luna: Which means the trading down trend has legs. I wouldn't be surprised if private label pet food gains another three to five points of share over the next 18 months. Lucas: I think that's a reasonable bet. And it's a good reminder that stagflation doesn't just hit humans — it hits the whole family, including the four-legged members. Luna: Well, on that note, I think we've covered a lot of ground. Pet food inflation is a surprisingly rich window into the broader economy. Lucas: It really is. And it's one of those categories where the numbers tell a story that most people don't think about. So next time you're in the pet food aisle, take a look at the price tags — you'll be looking at stagflation in real time.