Food Inflation or Deflation?

The world is a dynamic place. Speed of change from technology and politics has resulted in an uncertain environment for business. Several months back it appeared that tariffs were pushing food prices higher, but recent data shows prices going in the other direction. To amplify the uncertainty, data since the government shutdown has been questioned. The government just skipped October for many datapoints and the November and December data have been questioned because of the large swings. This makes forecasting challenging so we need to assess forecasts carefully until we can assess the validity of the recent data.

The lack of certainty is why forecasts should be done monthly or quarterly rather than annually. Understanding must be elevated to assess the signal and noise. Things change, some explained and some not, and the best way to understand what is happening is to consistently measure, assess, and adjust as needed. This consistent measurement will help us understand when the data or the market is not behaving as expected.

With that out of the way, let's talk about the most interesting stat in the grocery market today - food inflation or CPI FAH.  This is the tail that wags the grocery sales dog.  When it is higher, grocery sales are higher and vice versa.  The one exception is when food inflation starts to approach 4%.  Up until that point, higher food inflation does not impact units significantly, so higher inflation usually generates higher sales.  However, when it gets close to 4% growth and beyond, units are impacted so the sales increase is muted.

Even with the hovering tariff specter, food inflation appears to be softening.  We finished 2025 up 2.3% which is close to the long run average.  However, moving into 2026, all inputs – oil, farm products, food manufacture, and grocery retail margins – are flat to down YOY.  The USDA is forecasting 2026 food inflation at 1.7% and my forecast also came in at 1.7%.  The range will likely fall between 1.4% and 2.0% as seen in the charts below, but this assumes the November and December data is accurate.

Let’s look at the inputs to see what is causing food inflation to fall.  Oil is the first link in the supply chain which averaged $65/barrel in 2025. The Energy Information Administration (EIA) is expecting that same barrel to come in around $53 in 2026.  Thus, oil will likely continue to fall double digits for most of 2026. Oil was been the pressure relief valve for much of the economy in 2025 and is helping to push downstream costs lower in 2026.

The next link in the supply chain is farm products.  Expenses very widely within this group. Meat and Produce are expected to be up in 2026 while Milk and Eggs down.  Fertilizer is also expected to remain higher than historical trends due to tariffs.  For the forecast, we are estimating that farm products will up about 2% YOY in 2026.  This is partially impacted by looping higher values in 2025 and lower oil prices, which significantly impact farm costs.

The next link in the chain is Food Manufacture (CPG) prices.  Oil and farm products are the main drivers for Food Manufacture prices.  We see that CPG prices were consistently increasing since January 2024, but that line made a hard right in fall 2025.  So combining the current down trend with upstream weakness, we don’t expect the CPGs to price to aggressively in 2026.  For the forecast, we only assume an 0.5% increase.

The last link in the chain is grocery retail margins.  Like the other links, index growth has been largely flat which means declining YOY values.  This stat is also about to lap that spike from Jan 2025, so the YOY values will likely be soft for the Q1 and then bounce back in Q2.

Assuming the data is good, it does show the supply chain changing direction and food inflation will likely soften. Because this is the tail that wags the dog, this is important for grocery sales. To get at YOY grocery sales, you simply take the YOY food inflation value and add that to the YOY unit forecast. So if CPI FAH is 1.7% YOY and units do not respond positively to the lower prices, we will likely have a soft 2026 for US grocery sales. I will explore US units and sales in my next post!

If you would like to apply this rigor to your business, please reach out.