Consumers worldwide are feeling the strain on their wallets every time they shop for groceries. It’s no secret that food prices have surged, creating noticeable pressure on household budgets. Federal data reveals a significant 25% increase in food prices since the onset of the COVID-19 pandemic, and these prices remain stubbornly elevated for many.
This situation begs the question: what are the real drivers behind these high food prices, and is intervention warranted to regulate grocery stores and food companies?
To understand this intricate issue, we turn to expertise from Northeastern University’s food pricing specialist, John Lowrey. He emphasizes the complexity of the situation, particularly highlighting the lingering effects of the pandemic, which have significantly altered business pricing strategies.
Food prices are not static; they fluctuate due to a multitude of interacting factors.
“Prices have a lot of variability,” Lowrey explains. “When we talk about price gouging and setting prices, mind you, a retail store can have thousands of different stock keeping unit (SKU) items, and each SKU item can have different packaging sizes.” This inherent variability, even within similar product categories, makes straightforward price comparisons challenging.
But what underlies this price variability?
One key element is brand strategy, according to Lowrey. Retailers may strategically price certain food items to reflect and emphasize qualities like premium freshness or unique sourcing.
Custom food packaging also plays a role and is increasingly prevalent. Driven by sustainability concerns, many companies are transitioning to environmentally conscious packaging options, such as biodegradable or compostable materials. These eco-friendly alternatives often come with a higher price tag than traditional packaging, contributing to the overall cost.
Headshot of John Lowrey.
Another factor is the concept of “complementary relationships among products,” Lowrey points out. Products that are typically consumed together, like cereal and milk or hamburger buns and patties, allow retailers to strategically discount some items while potentially upselling others.
Time-based pricing strategies, including time-of-day or surge pricing, also naturally lead to price fluctuations. While some experts view these practices with skepticism, even labeling them as a form of price gouging, they contribute to the overall complexity of food pricing.
The Challenge of Price Comparison
This inherent price variability makes direct, “apples-to-apples” comparisons across different retailers or even within the same store at different times incredibly difficult, Lowrey notes.
“It’s hard to assume an informed perspective on prices because there’s a lot of unobserved heterogeneity or price dispersion at stores that can occur throughout the day or throughout the season,” he says.
Accurately identifying potential price gouging would require a meticulous comparison of universally consistent products and packaging across numerous stores. Lowrey emphasizes that “that’s very difficult to do.”
Furthermore, understanding a store’s cost structure is crucial. This encompasses both direct costs, such as the cost of the goods themselves, and indirect costs, including overhead and labor expenses.
“The other issue with the concept of price gouging is that cost is also largely unobserved, and I think this is one of the main criticisms in the whole price discussion,” Lowrey adds.
Retail giants like Walmart and Costco operate on a hypermarket model, explicitly competing on price. Their business model often allows them to secure volume discounts that smaller stores cannot, translating to lower prices for consumers at the checkout.
“In theory, these lower wholesale prices upstream in the supply chain translate into lower purchase prices for the consumer downstream,” Lowrey explains. “There’s discussion about why Walmarts and Costcos sell products at lower prices, and that’s because they have these scale economies that allow them to lower their costs, which then in turn allow them to lower their prices.”
Persistent High Food Prices: Multiple Contributing Factors
Recent data from the U.S. Bureau of Labor Statistics indicates that food prices continued to rise, increasing by approximately 0.2% from June to July and 2.9% over the past 12 months. While inflation has moderated somewhat from its 40-year high of 9.1% two years ago, a Pew Research Center study reveals that most Americans still consider it a top concern.
The period between 2019 and 2023 witnessed a 25% surge in U.S. food prices, fueled by a confluence of factors, including pandemic-induced supply chain disruptions, the war in Ukraine, and outbreaks of avian influenza.
Lowrey emphasizes that beyond supply chain issues, labor market dynamics and broader economic uncertainty continue to exert upward pressure on prices, keeping them elevated.
“Uncertainty or variability costs companies money in the sense that inventory is waiting longer on average, or is displaced or in the wrong position, which then you have to reroute,” Lowrey elaborates.
Another significant aspect is that retailers are still adapting to shifts in consumer demand patterns in the post-pandemic landscape.
“With COVID, there’s been a whole change in demand patterns,” Lowrey concludes. “It’s hard for stores to really figure this out with prices.”
In conclusion, the sustained high food prices are not a result of a single, easily identifiable cause. Instead, they are the product of a complex interplay of factors, ranging from lingering pandemic effects and supply chain vulnerabilities to strategic pricing models and evolving consumer behaviors. Understanding this complexity is crucial for navigating discussions around food prices and potential regulatory interventions.
