Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Grocery Industry
Transcript
- Lucas: You know, one thing that keeps popping up in the economic data is how grocery prices have stayed persistently high even as overall inflation shows signs of cooling. Luna: Yeah, I was just looking at the June CPI release. Headline CPI dipped to 332.6 from 333.98, but food at home is still running hot. Lucas: Right. Core CPI flatlined at 336.1, but the PCE price index actually ticked up to 131.5 from 130.94. So the direction is mixed, but grocery is one area where consumers are feeling it every week. Luna: And that's the stagflation challenge: growth is okay—real GDP annualized at 2.1 percent—but prices aren't coming down fast enough for things people actually buy regularly. Lucas: Exactly. So let's talk about how grocery retailers are adapting. The big story is the surge in private-label or store-brand products. When margins get squeezed on both sides—higher input costs and price-sensitive shoppers—retailers push their own labels harder. Luna: I've seen that firsthand. Even premium grocers are expanding their store-brand lines. It's not just about cheap mac and cheese anymore; you can get private-label organic yogurt or artisan pasta now. Lucas: Exactly. And the numbers back it up. Private-label market share in U.S. grocery has climbed past 20 percent, up from around 17 percent pre-pandemic. That's a huge shift in a low-margin business. Luna: So retailers are basically training customers to accept store brands as a permanent substitution, not just a temporary squeeze. Lucas: Right. And that has long-term implications for brand manufacturers. But let's get to the supply side. Import prices from China just hit their highest level since 2008, according to the latest data. That affects a ton of packaged goods and supermarket non-food items. Luna: And with the threat of new tariffs—Trump's global tariff on forced labor just drew rebukes from trade partners—retailers are bracing for even higher costs on everything from canned goods to cleaning supplies. Lucas: So you see companies like Walmart and Kroger investing in domestic sourcing and automation to offset those costs. But that takes time and capital. In the short run, they have to decide whether to pass through price increases or absorb them. Luna: And absorbing them hits margins, which is tough when same-store sales growth is slowing because consumers are buying less volume. Lucas: Yeah, we're seeing a classic trading-down pattern. Shoppers are switching from national brands to private label, buying in bulk less often, and choosing smaller pack sizes to manage cash flow. That's a stagflation signature. Luna: It's also hitting the premium organic and fresh categories. People still want quality, but they're more price-elastic than they were a couple years ago. Lucas: One interesting data point: the unemployment rate is still at 4.2 percent, and jobless claims just fell to 187,000—that's a historically low number. So the labor market is tight, which means wage growth is still around, but it's being eaten by inflation at the checkout. Luna: So the consumer is employed and earning more on paper, but real purchasing power is stagnant. That's the textbook stagflation scenario for the grocery aisle. Lucas: And the industry is responding with more aggressive loyalty programs, targeted digital coupons, and even shrinking package sizes—shrinkflation is still alive and well. Luna: Right, the classic three-pronged response: private label, shrinkflation, and promotions. But there's a limit to how much you can shrink before customers notice and revolt. Lucas: True, and that's where the competitive dynamic gets interesting. Discount grocers like Aldi and Lidl have been gaining share for years, but during stagflation they become even more formidable. They're built for this environment. Luna: And traditional grocers are fighting back by cutting prices on staples and betting that their fresh departments will keep customers loyal. Lucas: So the next few quarters will be a real stress test. If the economy doesn't slip into full-blown recession, grocery margins might stabilize as consumers adjust. But if growth falters further, we could see a wave of consolidation. Luna: It's a tough spot. And you know, if walking through the economy with us has made something click, one way to keep this show ad-free and independent is through listener support. Lucas: Yeah, it's simple—you can go to buy me a coffee dot com slash fexingo. That's it. No tiers, no merch, just a way to chip in if the show adds value for you. Luna: We appreciate everyone who already does. It helps us keep the economics conversation going without sponsored interruptions. Lucas: And back to grocery—another angle to watch is how online grocery is evolving. During the pandemic, delivery and pickup boomed. Now, with higher costs, some retailers are raising minimum order thresholds for free delivery or charging pickup fees. Luna: That could push some customers back to in-store shopping, which actually helps margins since in-store is generally more profitable per order. Lucas: Right. So the stagflation era is basically accelerating a bunch of structural shifts that were already underway: private label adoption, discount store growth, and more disciplined operations. Luna: I think the big question is whether these changes stick when inflation eventually falls back to target. If consumers get used to store brands, they might not switch back. Lucas: Exactly. And that's the kind of echo from the 1970s that this show likes to track. Habits formed during high-inflation periods can last decades. We'll be watching. Luna: Sounds good. Next time, we'll look at another industry facing similar pressures. Lucas: Until then, keep your eyes on those grocery receipts—they tell a bigger story than you might think.