The Reasons Behind the Painful Surge in Grocery Prices

The post-Covid surge in grocery prices has been a noticeable and financially painful part of the rising U.S. cost of living. Shoppers couldn't miss the sharp price increases, such as the doubling cost of a can of tomatoes or the significant rise in beef prices.

Economist Thomas Klitgaard from the Federal Reserve Bank of New York analyzed the causes of this increase. Here are the key findings:

     Stable prices before pandemic: The consumer price index (CPI) for food-at-home was stable for the five years prior to the pandemic, indicating little change in grocery bills from 2014 to 2019.

     Sharp increases during pandemic:
     • 2020: Prices rose by 4%.
     • 2021: Prices increased by 6%.
     • 2022: Prices jumped by 12%.

     Overall, the food-at-home index increased by 25% from Q4 2019 to Q1 2023.

     Key components driving price increases:
     • Commodity Prices: The underlying price of commodities, especially grains, saw significant increases. This rise cascaded down to other food items like beef, pork, poultry, eggs, and dairy products.
     • Wages: The wage bill at supermarkets rose substantially, contributing to higher grocery prices.

     Minor Impact:

     • Price gouging: Klitgaard's analysis suggests that price gouging by companies was not a significant factor in the price increases.

     Bottom line:

The surge in grocery prices was driven mainly by substantial increases in commodity prices and supermarket wages, rather than price gouging. The stability of grocery prices before the pandemic underscores the dramatic impact of these factors during the early 2020s. While grain prices have slumped since 2022, the wage bill keeps going up — with average hourly earnings up 6% in May from a year before. And Klitgaard warns that may bode ill for shoppers going forward. “An open question is whether grocery inflation can stay as moderate as it has been since early 2023 with grocery worker wage inflation still elevated,” he wrote.