Food Inflation Outlook - July 2025

The CPI Food-at-home came out this week. The YOY growth dropped from 2.4% to 2.2% and has been trending horizontally for the last five months. I have been waiting patiently for food inflation to pick up due to tariffs and the market disruptions, but have yet to see any definitive signs. But Farm Product prices did bump up significantly in July. Could this be the first domino to fall?

As a reminder, the high level Grocery supply chain is oil prices, farm prices, food mfg prices, and then grocery retailer gross margin. Oil prices have been down significantly, bottoming out in April 2025 at -25% YOY. This has been part of the reason why tariff driven inflation has been minimal. But the last two months, oil has rebounded a bit. The price for a barrel of oil has increased from about $62 to $67, which is pushing Farm Product prices higher.

Farm prices bumped up signficantly from 5% to 8% YOY in July. Part of that is driven by oil, but a lower dollar, higher farm exports, and weather are also likely contributing. It is also possible that distruptions in trade and higher tariffs are also playing a role. This is ONLY one month so we can't get too excited, but this will be an issue if it stays elevated.

One of the primary reasons CPI FAH has been moving horizontally is because Food Manufacturing prices have also been moving in that direction. Manufacturing prices have been moving horizontally because Farm Product prices have been trending down. That is why higher Farm Product prices matter because they drive Food Manufacturing prices which drive overall food inflation.

The forecast is still missing on the high side but not significantly. This means given the inputs, we would expect a higher CPI FAH. It is likely that all entities along the supply chain are eating some of the higher costs until the future becomes a bit more clear.

For the next six months, the model expects CPI FAH to fall between 2.3% and 3.0%, which is up 30 basis points from last month.

The latest six month forecast (yellow line) ticked up particularly in latter part of the year. As we can see, it has consistently missed on the high side, but not significantly. We are missing by about 50 basis points or a half of percentage point. The consistent miss is not ideal and does suggest we are missing a variable, which is tough to gauge because we don't have a lot of experience dealing with this level of uncertainty.

To wrap it up, I will be anxiously awaiting the numbers for next month. If Farm prices remain elevated, we will then turn our attention to Food Manufacturing prices. The good news is 4% CPI FAH is still in the distance, so 3% inflation will likely be good for grocery sales because negative unit impacts will likely be minimal. The consumer will also be interesting to track because they may be more sensitive to price increases today than they have been historically. If that happens, we may see unit impacts before we hit approach 4-5%. These are all things we will be watching in the upcoming months, so come back if you are interested in how the ongoing food price saga evolves.