Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Grocery Prices Stay High as Inflation Cools
Transcript
- Lucas: So the headline this month is that inflation is cooling — the CPI ticked up just a hair in July, from 332.57 to 332.8. But if you've walked into a grocery store recently, you might be scratching your head, because the basket of stuff you actually buy — eggs, bread, produce — that still feels like it's climbing. Luna: Right, and that gap between the official number and the real-world receipt is something we've touched on before, but I think we haven't really drilled into why grocery prices specifically are so sticky. Lucas: Exactly. And I think it's worth doing that today, because when you look at the producer price index for food — that's what farmers and food manufacturers get paid — that's actually been softening. So there's this puzzle: input costs are easing, but supermarket shelves aren't reflecting it. Luna: So the producer price index is telling a different story than the consumer price index. How wide is that gap right now? Lucas: Well, the producer price index for food has been moderating for a few months now, but the retail side is still running hotter. And I think the key is that there's a lag — what happens at the farm gate doesn't hit the shelf for a while. But there's also something structural going on, and I want to get into that. Luna: Before we go deeper — if today is actually useful to you, the way these stay ad-free is listener support. You can buy me a coffee at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's the whole model. It keeps this show commercial-free and lets us go down these rabbit holes. Appreciate anyone who chips in. So, back to the grocery puzzle. Luna: So what's the structural piece? Why aren't grocery prices falling when the producer side is cooling? Lucas: Let's talk about labor costs first. Grocery stores are incredibly labor-intensive. You've got cashiers, stockers, butchers, produce clerks — and wages in retail have been climbing steadily. Even if the cost of the food itself goes down, if you're paying your staff more, that puts upward pressure on the final price. Luna: And it's not just wages — it's also transportation. Fuel prices have come down from their peaks, but trucking rates are still elevated. Lucas: Right, and there's also the issue of shrink — that's retail-speak for spoilage, theft, damage. With tighter margins, stores are more sensitive to that. And they've also learned that consumers are somewhat used to higher prices by now. There's a psychology to it. Luna: So you're saying they're not lowering prices because they don't have to — because people are still buying? Lucas: Partly. Look, grocery margins are famously thin, but the last couple of years have been better than usual. Retailers have been able to pass through cost increases and then some. And now, even as input costs ease, they're holding onto those higher prices to rebuild margins or just to protect against future volatility. Luna: And there's also the fact that some food categories are still genuinely rising. I mean, eggs had that bird flu spike last year, and produce is always weather-dependent. So it's not like everything is falling at the producer level. Lucas: Exactly. You have to disaggregate. Grains are down, dairy has been mixed, but things like beef and fresh vegetables are still elevated. And those are the things that show up on your receipt every week. Luna: So what does the CPI actually say about food at home versus food away from home? I remember the rent episode, and there's a similar split there. Lucas: Good comparison. In the latest CPI, food at home — that's groceries — was up about 1.8 percent from a year ago. Food away from home, restaurants, was up a bit more, around 3.5 percent. But the point is that both are running above the overall inflation rate, which is hovering around two-and-a-half percent. Luna: So groceries are actually below the headline, but they feel worse because you see them every week. Lucas: But the feeling is also driven by the cumulative effect. Over three years, food prices are up something like 20 percent. So even if the year-over-year number is moderating, the level is still painfully high compared to 2020. Luna: And that's what the Fed cares about, right? They look at the PCE price index, which gives food a smaller weight, and that's been cooling too. But the average person doesn't spend their money according to the PCE basket. Lucas: Right, and that's the tension. The Fed's preferred gauge, the PCE, actually fell in June — it went from 131.53 down to 131.4. But core PCE ticked up. So the Fed is watching one set of numbers, while voters are watching their grocery receipts. It's a political problem, too. Luna: And speaking of the Fed, the ten-year breakeven inflation rate — that's a market-based measure of inflation expectations — has been creeping up, from 2.30 to 2.34 in just a couple of days. So even the bond market is saying inflation isn't dead. Lucas: That's a great point. So what do we tell listeners? I think the takeaway is that grocery prices are unlikely to fall back to pre-pandemic levels. We might see some individual items go down — and we have seen lettuce prices plunge at times — but the overall basket is going to stay elevated. Luna: So the 'new normal' for food prices is just higher than before. Lucas: And it's not just about the food itself. It's the entire supply chain — labor, energy, packaging, even the cost of financing for these companies. And until those pressures fully ease, you're not going to see supermarkets slash prices. Luna: What would have to happen for us to actually see grocery prices drop? Lucas: We'd need a sustained decline in producer food costs, which we're starting to see, and then we'd need retailers to believe it's durable. If they think the cost savings are temporary, they'll keep margins fat. But if they see a clear trend, competition might force them to pass it along. Luna: And that's the thing — competition. If one big chain starts cutting prices, others have to follow. So maybe we'll see that in the fall, when harvests come in. Lucas: Let's hope so. For now, I think the practical advice is to be smart about what you buy. Watch for sales on items that are seasonally abundant, and don't assume that the sticker price is going to come down anytime soon. Luna: And maybe buy more store brands — I've noticed those are often significantly cheaper and sometimes just as good. Lucas: That's a solid tip. Look, the bottom line is that inflation is cooling, but the cost of eating is still a real pain point for a lot of households. And understanding the why — the labor, the transportation, the psychology of pricing — helps you plan and maybe not feel so crazy when your cart total seems high. Luna: And it also helps to know that it's not just you. The data shows this is a widespread experience. Lucas: Exactly. So keep an eye on those producer price reports, because they're the earliest signal of where grocery prices might head next. And as always, we'll keep tracking it for you.