Food prices drove much of the inflation rise in January, according to the latest data from the Bureau of Labor Statistics. And there's no relief is in sight for consumers struggling with sky-high food expenses, says one strategist.
“Part of the problem beyond the cost of raw materials is the packaging materials; 80% is made in mainland China, ” Strategic Resource Group Managing Director Burt Flickinger said in a recent Yahoo Finance Live segment. “And that applies to salt and snacks, cookies and crackers, all the way to sports beverages. So prices [are] high and going higher.”
As Flickinger suggested, raw materials and packaging made in China have seen sharp price increases, which have been passed through to consumers. China, like the US, experienced high inflation in 2021, though price pressures appear to be cooling in recent months. Food companies are paying more for packaging and continue to struggle with ongoing labor supply issues and employment shortages.
Cereals and bakery products had the largest increase of any food category at 1.8%, according to BLS’ January Consumer Price Index report, while dairy was up 1.1%. Produce items experienced similar price hikes, with fruits and vegetables increasing 0.9% while meat, poultry, fish and egg prices went up 0.3%.
Most economists see inflationary pressures persisting for at least the next few months. “The factors that have driven inflation higher in 2021 are only expected to dissipate gradually and are likely to keep pushing inflation higher through the first half of 2022,” chief U.S. economist Kevin Cummins of Natwest Markets told Market Watch last week.
The latest price increases largely reflect rising production costs, not increases in unit sales, Flickinger said. “In the retail sales increases, about 50% to 60% of that is inflation, not increased unit sales,” he explained. “So we're in a supply chain crisis and an inflation crisis, the worst we've seen in 40 years, dating back to 1982. And we'll continue to be bad for the balance of this year.”
Price elasticity remains low
Businesses are likely to keep raising their prices, in part, because they know consumers will pay. Companies like Starbucks (SBUX), that serve non-essential food items, have expressed little trepidation in passing higher costs onto consumers in the form of higher prices. CEO Kevin Johnson told analysts during a call earlier this month that the world’s largest coffee chain was planning on continuing price increases in 2022 after several price hikes last year.
Speaking on the recent price increases, "We have not seen any meaningful impact to customer demand," said John Culver, Starbucks chief operating officer. "To the contrary, our customer demand continues to grow."
As grocery costs have gone up, fast-food prices have seen sharp increases, too. A meal at Chipotle on average 10% more than it did a year ago, according to the company’s earnings call last week. The fast casual chain earned $2 billion in revenue during Q4 2021, beating expectations, and comparable restaurant sales climbed more than 15%.
Companies like Chipotle (CMG) and the fast food king McDonalds (MCD) have warned the public that relief from high prices is unlikely to come anytime soon. Larger companies can often rely on high brand power and customer loyalty to retain business in the midst of rising inflation. “We're pretty fortunate with the pricing power that we have," Chipotle CEO Brian Niccol told CNBC. "Our brand is really strong."
Similarly, PepsiCo CEO Ramon Laguarta said on Feb. 10, “We see inflation going up everywhere. We have the brands, and we have again the capabilities to price … We’re feeling good about how our consumers are staying loyal to our brands in spite of some of our pricing decisions.”
With supply chain issues persisting and customers continually willing to buy higher priced items from their favorite brands, consumers are likely to see multiple bouts of price hikes for food at home and away from home this year, Flickinger said.
“Typically, there's one price increase every fiscal year, every crop year,” he said. “Last year, there were two price increases. This year, there will probably be three price increases. So the brand manufacturers know with a short supply of packaging and product, they can raise prices with impunity because they focus on margins. ... So for profitability and increasing the stock prices, the brand manufacturers are raising prices with impunity.”
Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.