Oil Prices Are Up 60%. What Does That Mean for Your Grocery Bill?

Last week I talked about how oil ripples throughout the grocery supply chain. This week I add some numbers to the story.

The Timeline

On December 16th, 2025 oil prices bottomed out at $55 and then started to creep up in the new year. January 26th U.S. warships arrived in the Middle East and oil prices jumped from $60 to $65 and then leveled out. Iran and the U.S. held direct nuclear talks on February 6th and oil prices dropped from $64 to $60. Then prices increased 10% on February 17th when the Iranian government said it was temporarily closing the Strait of Hormuz. On February 26th Iran and the U.S. held another round of talks but oil prices did not fall this time. Two days later, the U.S. launched a strike on Iran — oil futures climbed from $66 to $71. Since the conflict began, oil futures have climbed from $71 to $94.

Oil prices were expected to be between $50-$55 a barrel in 2026 as healthy supplies were expected to continue. It is safe to say that oil prices today are about 60% higher than expected. If oil prices average $80/barrel for the rest of 2026, oil prices will be about 20% higher versus 2025. In a world where the economy is still trying to shake the last vestiges of Covid inflation as well as tariffs, oil was an important pressure relief valve and helped to counter some of the upward pressure on overall inflation.

A Look Back

We have had a few oil shocks in the last 40 years — the Gulf War, the Great Recession, and the Ukraine Invasion. The numbers are in the table below. The US/Iranian conflict is increasingly looking the Gulf War which resulted in a 116% increase in oil prices.

The Great Recession impacts were understated because of demand decreases while the Ukraine Invasion is overstated due to stimulus which kept everyone buying and prices high.

There are only a few datapoints, but the takeaway is the Gulf War and Great Recession events were manageable and did not drift significantly from the long-run trend of about 2%. Each spike lasted about 4 months — and the shorter the spike, the less impact it will have. The Ukraine spike is an outlier because consumers were packing stimulus money so they were willing to buy even when prices were increasing, which helped to push food inflation to record highs.

Event	Oil Spike	CPI FAH	Notes
Gulf War 1990	116%, 4 months	+2.3%	Clean signal
Great Recession 2008	40%, 4 months	+3.4%	Understated — demand fell
Ukraine Invasion 2022	38%, 6 months	+11.1%	Overstated — stimulus demand

One finding that stands out from the historical record: oil price increases get passed through to food prices more than oil price decreases. I think this is something we all suspect but the data helps to confirm. In 2008, oil crashed 48% after peaking — yet CPI Food at Home still rose another 0.8%. After the Ukraine spike, oil fell 38% — yet consumers saw food prices rise another 4.7%. When oil goes up, you pay more at the grocery store. When oil comes back down, do not expect food prices to necessarily follow.

The Supply Chain: From Oil Well to Grocery Shelf

As discussed last week, oil does not hit your grocery bill directly. It travels through a chain of price indices before reaching the consumer, and at each stage the signal weakens. Moreover, grocery prices have much larger swings than all other elements of the grocery supply chain.

Oil  →  PPI Farm  →  PPI Food Manufacturing  →  CPI Food at Home

Stage	20% Oil Shock Impact
PPI Farm	+3%
PPI Food Manufacturing	+4%
CPI Food at Home	+1%

The models show that a 20% oil shock lasting 6-12 months will bump farm prices by about 3%, food manufacturing by 4%, and consumer food prices by about 1%. If the spike remains less than six months, we may see food inflation nudge from the current 2% to something closer to 2.5% — very manageable, and as I have mentioned in previous posts, inflation under 4% is generally good for the bottom line.

The Sleeper: Retail Labor

Wages are another important piece of the food inflation puzzle — the model showed retail labor had more impact on consumer food prices than food manufacturing costs. Grocery retail is labor intensive, and if oil prices remain elevated for a sustained period, workers could demand higher wages to offset rising living costs. And retailers, facing permanent wage increases, pass them through.

In the chart above, we can see retail wage growth trending up through much of 2025. It is currently at 4.5-4.75% year-over-year and accelerating — up from a trough of 2.1% in early 2024. Add this to oil prices and we could see a meaningful increase in food prices if the conflict is not short-lived.

Duration	Oil Impact	Labor Impact	Combined
1-2 months	0.25-0.5%	Inactive	0.25-0.5%
3-6 months	0.5-0.75%	Partial	0.75-1.25%
6-12 months	1.0%	Active	2.0-3.5%

Bottom Line

Looking back at the data, it was surprising to see that oil did not have a bigger impact on food prices. I was likely experiencing a little Covid/Ukraine recency bias. It also suggests that shocks are not expected to last, so all elements in the supply chain hunker down and weather the storm. If cost increases are expected to be permanent, like wages, that is much more likely to push food prices higher. The consumer also plays a role. If they continue to buy as prices increase, that will move food inflation higher, but in the current environment I don't see that happening. My unit forecast, which I will be releasing next week suggests volumes slowing.

The analysis assumes oil will average $80 a barrel for the rest of the year — approximately 20% higher than 2025. A 20% sustained oil shock adds roughly 1% to food inflation through the commodity chain alone. Retail wages, already running near 5%, add another 1-1.5% if the shock persists beyond 6 months.

Worst case, if oil remains near $80 and the shock extends through the rest of 2026, food inflation could surpass 4%, while a short conflict will only push prices up marginally with no significant impact on units. The latter is the more likely at this point but that could easily change with the geopolitical uncertainties.

For retailers it is probably a good time to be neutral with regards to budgets. Goldman Sachs is forecasting WTI oil at $62 by Q4 2026, which would imply a short-lived conflict.

Methodology: Analysis based on OLS regression using first-differenced log price series, 1986-2026 monthly data. Supply chain transmission estimated sequentially: Oil → PPI Farm → PPI Food Manufacturing → CPI Food at Home. Historical episode validation: Gulf War 1990, Great Recession 2008, Ukraine Invasion 2022.