4 Factors Driving Food Price Inflation

Labor shortages. Supply chain disruption. Higher energy prices.

These aren’t the things that come to mind when people think about Thanksgiving. But when they head to the grocery store to do their food shopping or go to a restaurant with their family for their Thanksgiving meal this year, those three issues will certainly be evident in the cost of their bill.

“Anyone who has purchased food lately knows that food prices are rising and rising pretty sharply,” said Curtis Dubay, senior economist for the U.S. Chamber of Commerce.

The cost of eating out at a restaurant is about 4.7% higher than it was at this time last year, for instance, while grocery store and supermarket purchases are 5.3% higher than a year ago. To put that in perspective, during the decade prior to the start of the pandemic the average annual increase in grocery store and supermarket purchases was only 1.3%. Overall, prices across the board are up 6.2% this year, the highest level since 1990.

During a recent U.S. Chamber of Commerce event, food industry leaders discussed the complex stew of factors driving food price inflation and why this could be, as some headlines have suggested, the most expensive Thanksgiving ever.

Labor shortages

Perhaps the single biggest factor contributing to higher food prices is the fact that food manufacturers can’t find enough workers to meet demand, which is a dynamic nearly every industry has been experiencing since the pandemic. There are not enough workers to unload containers in ports, for instance, and not enough truck drivers to move the food to distributors and stores.

“It’s extraordinarily difficult to attract and retain new employees,” says Andrew Harig, Vice President of Tax, Trade, Sustainability, & Policy Development at the Food Marketing Institute. Harig noted that more than 80% of FMI members provided bonuses and increased benefits to attract and retain workers since the pandemic and it still hasn’t helped much to ease the labor burden.

“You’re competing against not only the food supply chain, but also with other consumer goods supply chains,” he says.

While this is not a new issue, it’s one that has been exacerbated by the pandemic. Currently, there’s not enough new entrance into the industry, and it’s more difficult to mitigate these problems as they grow more severe in today’s climate.

“Getting people back to work easing that labor supply is No. 1,” said Harig. “It's not a silver bullet. It won't solve all of the problems, but it is the necessary first step to do this.”

Supply chain disruption

The food industry is not immune to the supply chain issues impacting other industries either. Not only does a lot of food like pork come from overseas producers, but so do many of the materials like aluminum and cardboard food manufacturers use in their packaging. For instance, “plastic is really difficult to get your hands on right now,” Harig noted.

He says labor shortages, coupled with issues like tariffs and product scarcity, is leading to higher food prices. Meat, in particular, has seen a major spike in prices, with beef up 22%, pork up about 16%, and chicken up about 13%.

Jayson Lusk, Head of the Department of Agricultural Economics at Purdue University, added that, to catch up on the backlog inventory from last year’s meat-packing plant shutdowns, workers have had to pick up weekend shifts.

“They’re running extra shifts on Saturdays [and] Sundays, and people aren't willing to do that for free,” said Lusk, noting that’s where wage premiums and disaster payments come into play. “That’s what it took and is taking to keep workers in those plants running close to full capacity.”

The energy crisis

A confluence of factors, from extreme weather conditions to increased demand, is causing a national energy crisis of sorts. Oil prices are currently at their highest level since 2014, while natural gas prices have nearly doubled.

What does that have to do with food? Well, energy feeds into the operating costs for food manufacturers and producers. Everything from fertilizer to harvesting milk from cows has an energy component.

Dean Foreman, chief economist at the American Petroleum Institute estimates that energy could account for between 20% and 30% of absolute agriculture costs. It used to be that energy was “a bit of a relief valve for rising prices and expenditures of food, education and health care,” says Foreman. But not anymore.

“We've had a big drop-off in capital expenditures and investment,” he says. “CapEx directly correlates to the amount of drilling activity, and hence supply that's likely to come.”

This lack of investment brings an increase in potential price pressure, which is exactly what is playing out as it relates to food inflation right now.

Higher wages, more demand

Consumers are spending about 20% more on food at grocery stores and in restaurants now compared to before the pandemic. But higher prices are the only reason for the increased spending. “There’s just more food buying that’s happening overall,” says Lusk.

Part of that can be traced back to the beginning of the pandemic, when consumers “pantry loaded” as lockdowns went into effect. Lusk notes, however, that people haven’t really changed their food buying habits since then.

He says stimulus checks, higher wages to attract and retain workers, and other factors mean there is both more money in the economy overall and more money for people to spend individually. On the one hand, the increase in money supply decreases the value of each dollar, leading to higher prices to make up the difference.

And, on the other hand, it’s simple economics — “if demand for food is increasing, that’s going to pull up prices.”