Consumers Are Cheering Food Deflation, Retailers Are Not

The Lempert Report
April 14, 2017

Will food prices come back to their normal level anytime soon?

2017 is expected to end with an annual drop of between 0.5% and 1.5% in the retail price of food prepared at home, according to the U.S. Department of Agriculture’s Economic Research Service. While that might not seem like a big difference, remember that we have come off of the highest food prices in decades, mostly due to climate conditions across the globe and the impact of animal and bird diseases. 

The situation has created price wars that we haven’t seen the like of for years and retailers are struggling. Kroger cut its sales and profit forecasts and lowered its capital investment plans after two difficult quarters earlier this year. It is offering buyouts to about 2,000 non-store employees.

Albertsons, has postponed its initial public offering of stock, and has acknowledged struggling with “deflationary trends” this year and saw sales drop 1.7% in the first two quarters of 2016, compared with nearly 5% annual sales growth in 2015. 

The annual value of U.S. agricultural sector production is expected to fall 5.9%, to $403.7 billion in 2016, almost entirely due to declines in the value of animals and animal products, according to the U.S. Department of Agriculture.   

In addition to climate conditions, the strong U.S. dollar is to blame, which hurt  exports and made imported goods cheaper. U.S. agricultural exports are expected to decline by $1 billion to about $139 billion, while imports are projected to post a $7-billion gain to a record $123 billion, according to the USDA. 

Retail prices for beef and veal are expected to end the year down about 6% to 7%, largely because of decisions made in 2015 as Texas and Oklahoma recovered from a five-year drought that had driven up prices, pork is expected to slide 3% to 4% and poultry will be down about 2% to 3%, according to the USDA.  

Eggs are selling at about two-thirds of last year’s price, the rebound after the high prices caused by the avian flu epidemic last year.

Consumers are rejoicing, but the reality is that according to USDA prices should come back to their normal level after the second quarter of the year.