Food Inflation Outlook - May

The May CPI FAH and PPI numbers were out this week.  As the model predicted, we did see an uptick in food inflation in May (see chart below), and are expecting to see another 50 to 75 basis point increase this summer.

We are still not seeing much evidence that the tariffs are elevating food prices signficantly. The Food, Feeds, and Beverage Import Price Index continues to soften, peaking with anticipation after the election but is regressing back to pre election trend of about 5%.

Looking at the food inflation drivers, we can see oil remains 20% lower than last year. This is expected to change, however, as geopolitical uncertainties in the Middle East expand. Farm product also continue to trend down after a year of price increases. PPI Grocery, which is the margin that grocery retailers add to wholesale prices, continues to move horizontally. The CPI FAH forecast continues to increase, however, because of Food Manufacturing prices, which has the biggest impact on food inflation. It remain elevated around 5% but should start to come down if the farm products PPI continues to fall.

The forecast below continues to track with the historical values but is missing a bit on the high side vs. the actual values. This model and corresponding chart is saying, given the supply chain costs and the past patterns in the data, food inflation should be about 100 basis points higher. The forecast, which is the red line, is starting to move lower given the expected decline in food manufacturing costs in the future.

Looking at the running 6 month forecast below, we can see the forecast a bit above the historical values, which is the black line. If the model is doing its job, we should see food inflation elevate. Essentially the model is saying that based on the leading indicators, we should food inflation increase to about 2.75% this summer and then begin to trend down to about 2%.

The good news for grocery retailers is tariffs are not impacting food prices at this time. Many economists have said we should see tariff impacts in April and when that did not happen, they said May. There will likely be some upward pressure in the upcoming months, but just when and how significant is TBD.

Food inflation around 2%-3% is the sweetspot for retailers because it allows for some price growth but it does not impact units. As mentioned before, units start to get squeezed when inflation hits 4%-5%. Overall, a good outlook considering all of the uncertainty.