The market has been focused on reopening trades, used cars and rents on inflation. However, food inflation has been increasing at a rapid pace as well, accounting for over 30% of the month-over-month increase in the Consumer Price Index in September, rising 93bps. Outside of April 2020 pandemic-related levels, that’s the highest reading since July 2008. While “food away from home” (i.e., dining out) has generally driven September food price increases, the month saw a 1.24% increase in food at home—a major acceleration from August’s 0.37% number.
Within “food at home,” proteins (meat, poultry, fish and eggs) were up 2.2% on the month. To put that in perspective, excluding the post-pandemic increases in April/May 2020, it’s the third-highest level since August 1986. (Other high points were June 2021 at 2.5% and November 2003 at 2.9%.)
Supply pressures have been well-documented, but it’s worth noting the following comments from Kroger, the large U.S. grocer, on its September earnings call:
- “Overall, one in three people have noted that groceries have gotten more expensive in the past month.”
- “…we believe inflation for the full year will be higher than originally contemplated in our 2021 business plan.”
On the food manufacturing side, Con-Agra had the following to say on its October call:
- “…our original plans for the year included additional inflation-justified pricing…we now expect to take incremental actions beyond those original plans.”
This is a double shock for restaurants, which were already having to charge more given their labor intensity, and hence exposure to higher labor costs. Full-service restaurants reported YoY inflation of 5.2% in September, their highest level on record (going back to December 1998), while limited-service restaurants saw an increase of 6.7%, their highest figure outside of August this year.
Given the increased prices for groceries and dining out (as well as gasoline), it’s reasonable to assume that workers will in general demand more compensation in a tight labor market, helping to drive up employer costs across the economy.
The Fed focuses on Core PCE, which includes food services (whereas Core CPI does not); should inflation in dining out remain elevated, that would be yet another issue for the Fed to consider as it gets closer to lift-off.
Rents, used cars and reopening services are important, of course, but we believe investors should pay close attention to food—because while travel and dining out are discretionary, eating at home is not.