Food Prices to Stay High, Declines Unlikely, Says UBS Analyst
Despite food prices no longer rising as rapidly, they are expected to remain at a higher level than in the past, with a meaningful decline unlikely, according to UBS analyst Paul Donovan. A significant portion of the cost that consumers pay for food occurs after it leaves the farm, with farmers receiving only a small percentage of the retail price. For example, in the UK, farmers received only about a third of the retail price for milk, with processed food margins being even smaller. This means that any price declines would depend on cost reductions further down the supply chain.
One possible source of savings is labor costs. The adoption of self-service checkouts, for example, can effectively reduce staffing expenses, as consumers “work for the retailer for free,” Donovan noted. However, profit-led inflation, where companies expanded margins to drive price increases, has already plateaued. Analysts point out that U.S. retailers’ profit share of retail GDP grew from 12% in 2019 to 21% today, making it unlikely that retailers would reduce margins to drive savings for consumers.
Consumers may eventually accept current price levels as the new norm, with shoppers typically holding a “fair price” in mind for about 18 months before adjusting their expectations. Over time, the perception of high prices fades, and the current price point becomes accepted. While food inflation has eased, the structural costs behind food production and distribution make significant price declines challenging.