Grocery Prices Have Been Falling. Did You Notice?

Enlarge this image toggle caption Joe Raedle/Getty Images Joe Raedle/Getty Images

Food prices in America were down for the longest period in about 60 years.

Wait, what?

It's not something that shoppers seemed to have noticed much.

"Are you serious? Really?" says Michelle German, holding a bag of groceries and wine at a Harris Teeter store in Washington, D.C. "I just spent about $40 dollars on four items and I'm like, wait, how did I spend that much money?"

But a number of foods — most notably, beef, eggs and dairy — saw some serious price drops over the course of 2016 and into 2017. For 19 months straight, the U.S. government reported declines in the food consumer price index, which compares supermarket prices with what they were a year earlier.

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The measure marked its first small uptick in July. (Year-to-year comparisons are more telling than month-to-month data, because they aren't affected by seasonal fluctuations.)

"It is rather a unique period, something certainly I've never seen in my 37 years," says Brian Todd, president and CEO of The Food Institute, an industry research organization. According to data from the Bureau of Labor Statistics, the last time the country went through such a long deflationary stretch in groceries was in the mid-1950s.

Typically, low food prices accompany a weak, struggling economy, says Jon Springer, retail editor at Supermarket News, a trade publication. "What happened over this last year has really taken people a little bit by surprise," he says, calling the period "unusual." Todd, too, called it "unique."

So, what happened?

Economists blame a confluence of factors. Energy and transportation costs fell, allowing food producers to operate more cheaply. But there was also a glut of food on the market: China started buying less food from the U.S. — and so did other countries, partly because American goods got more expensive as the dollar got stronger. Some experts also say Americans themselves contributed, through changing tastes — for instances, more people have been cutting back on beef.

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It all translated into a shift of supply and demand: People weren't buying as much beef and eggs as farmers and ranchers were producing.

"Our consumption is actually pretty good in the U.S. ... But, there's no way they can eat enough cheese and ice cream to use everything we produce," says dairy farmer Merri Post. "Although I'd like to sure see them try — I think if everybody had a little more cheese.... ," she adds, with a laugh.

Merri and Bill Post run the Middleroad Acres farm in southwestern Minnesota. Every day, their cows produce some 10,000 pounds of milk, which winds through plants in Iowa and Wisconsin to become cheddar cheese. Dairy is their lifeblood — they actually live on the same farm where Bill grew up.

Merri Post says they had prepared for low milk prices but didn't expect such a long streak. The couple grows the crops that they feed their cows, but she says they lose money with every bushel of corn they feed a cow.

"There are times you know ... you're writing a check for the privilege to milk your cows," says Post. "You're not making money. You are writing a check to do your job that day."

Last year, there was such a glut of dairy that some farmers were dumping excess milk. "We aren't at that," Post says. "Although our creameries are full. They can't take on more milk."

There's good news for Post, though: The dairy price index is slowly starting to tick up along with many other foods.

Grocery prices "will gradually go up," says Springer. "One of the big questions is how fast retailers will enact their own price increases because they've got to keep an eye on one another — because nobody wants to look like they're more expensive than the other guy."

The price war among grocery stores has been intense. The leading sellers, Walmart and Kroger, have been fighting Target and other competitors for the lowest price around. Even the typically upscale Whole Foods last week lowered prices for organic baby kale and avocado after its acquisition by Amazon closed. German chains Aldi and Lidl, which are adding stores in the U.S., are adding extra pressure with deep discounts.

"There is quite a bit of price competition already happening in the grocery industry, so they've got to be very cautious about" raising prices, Springer says. Todd, at the Food Institute, predicts that overall, prices this year will be higher by only about 1 percent, compared with last year.