Food Inflation Outlook -March

I posted the food inflation model a few weeks back. We broke down the grocery supply chain and built a model to predict food inflation in the next six months.

The initial model forecasted February 2025 to July 2025. This was before the 90 day tariff reprieve and the tariff talk was heated at that time. All of the food inflation inputs were increasing except oil. The forecast was consistently up for the next six months, hitting about 3% in July. The concern was the magical 4% food inflation number, which is when units are expected to fall because of the higher prices.

With the 90 day reprieve and two more months of data, the outlook has improved. All of the PPI inputs declined in March. Charts for each food inflation input is below.

As discussed in the earlier post, each of the PPI measures are leading indicators for food inflation. For example changes in oil prices have the maximum impact on food inflation in 9 months, farm products 7 months, and food manufacture 5 months. Since they are leading indicators we can use their values today as indicators for food inflation over the next 6 months. It is clear that the PPI inputs did improve in March. How did this impact the forecast? Does it still appear we are on our way to unit crushing inflation?

The updated forecast, which covers April 2025 to Sept 2025, does show food inflation increasing but the slope of the red line flattened out. It is now in the 2% to 3% range. Comparing the last two forecasts is in the chart below.

The last forecast is the blue line with all inputs escalating and heated tariff talks. The red line is the recent forecast and reflects continued declining oil prices and softer PPI inputs. The recent forecast does suggest that the dreaded 4% food inflation looks less likely. 

I also tested the 4% theory which was initially espoused by Goldman Sachs back in 2022. The chart above shows unit growth YOY and food inflation growth YOY. From the chart we see that on average grocery units YOY turn negative when food inflation (CPI FAH) is about 5%.

So are these changes due to recent tariffs being pushed out 90 days? No, this data is through March 2025 so these changes were already in the pipeline. Does the recent model mean we will not hit 4% or 5% food inflation in the upcoming months? No, but the chances are lower both because the food inflation inputs are falling and the tariff pressure cooker has eased up at least temporarily. There is always a chance that the PPI numbers bounce back next month and trying to predict what the current administration is going to do is a challenge to say the least. 

Overall, this is a very good forecast for grocery. The grocery industry performs the best when both price and units are moving in the positive direction. Plugging these results into my Grocery Forecast, there is a very good chance that grocery sales will exceed 3% YOY. I hope to finish up and present the grocery forecast tomorrow.