Take the case of Jeff Good, who co-founded three restaurants in Jackson, Mississippi. About 18 months ago, a 40-pound box of chicken wings cost him about $85. Now it can go up to around $150. Spending on cooking oil and flour has nearly doubled in the past five months, he said. But it’s not just ingredient prices that are rising. It also pays more for labor and services. Even the company that services its air conditioners has added a fuel charge of $40 per visit. To cope, he raised menu prices.
An order of 15 chicken wings, a signature dish from his Sal and Mookie pizzeria, cost $13.95 before Covid hit. Now the price of wings can vary so much that they are labeled at “market price”, as some restaurants do with lobster. At peaks, the menu price may be around $27.95 – but that’s barely there a margin – and Good estimates the “true cost” to be closer to around $34. He’s trying to decide whether to keep raising prices or take wings off the menu.
“We’ve never seen anything like what we’re seeing right now,” said Good, who opened his restaurants nearly 30 years ago.
The difference between the prices received by producers for their goods and those paid by ordinary customers at cash registers can be seen by comparing producer and consumer price indices.
The CPI, a benchmark for measuring inflation cited in headlines and by economists, jumped. Consumer food prices rose 9.4% in April from a year earlier, the biggest rise since 1981, government data showed this month. There were record increases for chicken, fresh seafood and baby food.
But many food costs measured in the PPI accelerated faster than the rate of the CPI. In April, average wholesale food prices in the index jumped 18% from a year earlier, according to government data released on May 12. It was the largest 12-month increase in nearly five decades. Eggs jumped 220%, butter 51%, fats and oils 41% and flour 40%, the National Restaurant Association said.
This is what life is like in the city with the highest inflation in the United States
The data suggests that pent-up inflation in the production and distribution pipeline will continue to feed through to consumer prices.
“Companies will do whatever they can to squeeze margins and not pass on higher costs to producers if they see any chance of prices reversing soon,” said Arlan Suderman, chief commodities economist for the StoneX financial services group. “However, they will eventually have to pass on these price increases.”
Price changes for foods included in the CPI basket lag the PPI by a month or two, so recent increases for producers “will likely translate into significant price increases that consumers will see over the next few months,” Stephen Stanley, chief economist at Amherst Pierpont Securities, said in an email.
And in the meantime, pressures on food production continue to intensify, signaling that the PPI could continue to climb. Farmers are facing a myriad of challenges, including fertilizer shortages, drought and adverse weather conditions, as well as an outbreak of bird flu in the United States that has killed nearly 10% of the nation’s laying hens. Moreover, the war in Ukraine and its effects on fertilizer supply and fuel markets only exacerbate the problems.
All of these factors will likely lead to reduced crops, livestock feed, meat and other food supplies – and contribute to more price increases.
Already in April, the US Department of Agriculture raised its 2022 forecast for producer price inflation for most food staples. On-farm cooking oils and wheat are expected to jump about 40% this year, compared to December projections of price increases of up to 5% and 4%, respectively.
The outlook for higher food prices reflects a broader trend for the US economy. A new era of high inflation should prove stubbornly above the 1.5% to 2% range that US consumers, businesses and investors have become accustomed to before the peak of the pandemic.
“We can expect high inflation to be more persistent,” said Fernando Martin, assistant vice president at the Federal Reserve Bank of St. Louis.
Read more: The era of inflation in the United States will last much longer
The situation also underscores why President Joe Biden has said Democrats need to work harder to overcome voter anger over inflation. Just last week, Biden called inflation “too high” but said the responsibility for tackling it lies with the US Federal Reserve.
For food prices, the impact of pent-up inflation will also come from the middle of the supply chain: distributors who store and deliver food to restaurants and other food service groups.
Independent distribution companies are seeing higher costs for everything from fuel to equipment to labor, said Mark Allen, chief executive of the International Foodservice Distributors Association. Inflation is in the mid-teens or higher among distributors, he said.
“That’s higher than what the government publishes,” Allen said, adding that more distributors are likely to raise their prices since their margins are only 1% to 2%.
To cope with soaring expenses, restaurants have already passed on some fees. Average menu prices in April rose 7.2% from a year earlier, the biggest 12-month increase since 1981, according to the National Restaurant Association. Diners also saw portions shrink.
Read more: Shrinkflation is coming to American restaurants
However, the margins are strongly compressed. And things could get even worse as many large restaurant chains and food retailers sign long-term supply contracts. As agreements signed six or 12 months ago are up for renewal, they will likely be set at the currently higher costs.
Even fast-food giant Wendy’s Co. recently raised its commodity inflation forecast for the year, citing rising costs for favorites like Baconator and Dave’s Double.
Small, independent restaurants typically have far fewer options to cushion higher costs.
“There are staple items that have gone up in price dramatically and touch every dish,” said James Mallios, partner at Manhattan’s Amali restaurant. The costs of butter, oil and beef have risen dramatically, he said. Disposable gloves cost about five times more than before the pandemic.
There is always the risk that continued rise in consumer prices will lead to demand destruction. That’s part of the reason why food retailers and manufacturers have so far been “sensitive to prices rising too quickly,” said Brian Choi, CEO of the Food Institute, which provides research, industry news and data.
“But eventually they will have to raise the prices,” Choi said. “There is still a lot of inflation to come.”
More stories like this are available at bloomberg.com