Why are your groceries still so expensive?
A deep dive into a mysterious and troubling question.
The big economic debate right now is over why consumer sentiment is still very low. Although negative narratives — “vibes” — may play a part, economic numbers like inflation surely matter a lot. In my roundup this week, I flagged some evidence showing that it takes people a while to get over the negative psychic impact of high inflation, even after a temporary burst of inflation is over. It seems likely that if prices go back down to where they used to be, it would help people feel better faster.
For some products, this actually happens. Gasoline prices have fallen by over a third since mid-2022, and are lower than they were a decade ago in dollar terms:
This is good news for consumer sentiment, since gas prices tend to affect the national mood even more than other prices.
But one very important item that hasn’t gotten any cheaper over the last year — and which is much more expensive than in 2019 — is groceries. “Food at home”, as the government calls it, started getting more expensive in late 2021. Since then, grocery prices have outpaced both wages and inflation as a whole:
Which means a whole lot of wage-earners in America are going to find it more difficult to put food on their tables than in 2019. In any reasonable world, seeing your holiday dinner get pricier is going to make you feel a bit poorer, and give you one more reason to feel pessimistic about the economy.
In fact, there’s research to support the idea that grocery prices are especially important in terms of influencing people’s beliefs about the economy. D’Acunto et al. (2019) find that frequent large increases in grocery prices cause inflation expectations to go way up. Grocery shopping, after all, is the main way that regular people interact with the macroeconomy on a day-to-day basis (other than filling up their gas tanks).
Why did food prices go up so much, so fast? Why haven’t they come down yet? And how could we make them go down? These are all important but difficult questions. The first thing we can do, however, is to rule out a couple of tempting but wrong explanations.
It wasn’t Vladimir Putin (or commodity prices at all)
When Putin invaded Ukraine in early 2022, the prices of wheat and other grains soared. That wasn’t surprising, because both Ukraine and Russia are key wheat producers. I was alarmed, because I worried this would cause chaos and hunger in poor countries, and I called for strong measures to increase the supply of staple grains. It turned out I needn’t have worried; high prices prompted farmers to produce more grains, and prices went most of the way back down:
But this didn’t seem to affect U.S. grocery prices much! Take a look at a graph of prices for wheat, flour, and bread:
Wheat is cheaper than it was before Biden took office. Flour is going down in price, but only slowly. And bread still keeps getting more expensive, though at a slower rate than before.
In fact, this is very normal. In the modern U.S., food prices tend to almost completely ignore the prices of agricultural commodities: