Todd Hale, Senior Vice President, Consumer & Shopper Insights, The Nielsen Company
While Americans have had many things to worry about during the recession and now the sluggish recovery, fast-rising prices at the supermarket were not one of them. The U.S. Department of Agriculture’s all-food index showed a modest 0.8 percent price increase from 2009 to 2010, and just a 0.3 percent increase in the price of foods consumed at home – the lowest levels of food price inflation since the 1960s. But at a time when many countries around the world are facing double-digit inflation on basic food items, can the U.S. be far behind?
The simple answer is no. The USDA is forecasting overall food prices to go up between two to three percent in 2011, due largely to the rising cost of commodities and lower supplies of basic ingredients – higher than the past few years, but certainly not the levels being encountered around the world. Demand for corn is at the highest levels in recent memory: supplies of the U.S. crop are at 15 year low as increasing demand from the U.S. ethanol industry is using existing resources. To get a better sense of how price increases could affect the average American household, it makes sense to look at overall food spending and how it compares to other countries.
Cost of Food
According to the USDA, Americans spent more than $607 billion on food consumed at home in 2009, and another $575 billion in food consumed away from home. For most of the decade, food eaten outside of the home was making steady gains, and by 2008, in-home and out-of-home food consumption was essentially on par. But the recession changed all that, and as consumers sought ways to save money, outside dining was one easy way to reduce household expenses.
The cost of food for the average U.S. household makes up a lower percentage of income than almost any other nation. Food accounts for just 6.9 percent of the average American household’s expenses, compared to more than 11 percent for the average Austrian household, 15 percent in a South Korean home, 42 percent in a Ukrainian home and 45 percent in a Pakistani home. On a per capita basis, that amounts to $2,208 in the U.S., $2,860 in Austria, but just $701 in Ukraine and $309 in Pakistan.
Inflationary Impact on Families
With that in mind, how might inflation affect the average American family? If the USDA’s forecast holds true, inflation of 2–3 percent would add $178 - $267 to the food bill per year. If inflation goes a bit higher than expected, say 4–6 percent, food would cost the average household another $356 to $554 each year – not an insignificant amount. But the real story is more complex. Consider the reduction in the social security tax rate for 2011: the decrease in the rate from 6.2 percent of income to 4.2 percent equates to an additional $1,000 in the average American’s wallet, enough to cover increased food costs and then some. And, we should expect increased demand for products and services in the U.S. as unemployment subsides throughout this year and consumer confidence builds.
With the cost of basic commodities such as meat, wheat, milk and eggs rising by high-single or low double digits, CPG manufacturers will need to raise prices. We think that most retailers will simply pass those costs on to consumers – a move that may prompt more households to shift to less expensive private label goods, which have already enjoyed solid growth over the past three years. A smaller percentage of retailers will resist price increases and will look to turn lower prices into a competitive advantage.
The stability of food prices during 2010 was a small blessing for families looking to control expenses during a time of economic uncertainty. But for retailers and CPG manufacturers, it has come at a cost. Unable to pass on cost increases to consumers, they have had to find new, innovative ways to maintain sales and margins. Some of this came through new product innovation, while others reverted to adjusting ingredients and package size. Now, however, it looks as if they may finally be able to justifiably increase prices as the economy improves and consumers show a renewed willingness to spend.
Cautionary Note: Global Oil Price Impact
With continued unrest in the Middle East and northern Africa and the resulting impact on global oil prices, we will likely see increased inflationary pressures from rising fuel prices have a similar impact on U.S. consumers as experienced in 2008 (i.e., shopping trip compression, more at-home consumption, value buying and increased coupon usage). Global demand for U.S. food in developing countries is great for U.S. exports, but those gains may also lead to higher food prices for U.S. consumers.