Investing.com – Food prices, although no longer rising as quickly, are expected to remain at a higher level than before, and a significant decline may be unlikely, according to UBS analyst Paul Donovan.
Most of the costs paid by consumers occur after the food leaves the farm. For example, in the UK, farmers have recently only received about a third of the retail price of milk, and margins on processed foods have been smaller. This means that any reduction in prices will depend on cost reductions further down the supply chain.
One potential source of savings is labor costs. Adopting self-checkout services, for example, effectively reduces staffing expenses, as consumers work for the retailer for free, Donovan said.
Profit-driven inflation, where companies widen profit margins to pay for price increases, has already stabilized. The analyst notes that the share of US retailers' profits from retail GDP rose from 12% in 2019 to 21% today. For prices to come down, retailers will need to effectively reduce margins and pass those savings on to consumers.
Consumers may eventually accept current price levels as the new norm. Shoppers typically keep “fair price” in mind for about 18 months before adjusting expectations. Over time, the perception of higher prices fades, and the current price point becomes acceptable.
Although food inflation rates have declined, the structural costs underlying food production and distribution make significant price declines difficult.
