Update: Grocery Price Inflation Has Cooled Substantially
Americans are exposed to grocery prices on at least a weekly basis, and they represent a significant share of household spending. In the most recent Consumer Price Index data, groceries made up 8% of the typical American’s spending, and data on consumption by income class (from 2022) show that groceries made up 11% of spending for those in bottom fifth of the income distribution.[1]
Of course, consumers care not just about inflation—the rate of change in prices—but also about the level of prices. Even with much slower grocery inflation recently there is concern about how much higher grocery prices are relative to earlier levels. In this post, we show that grocery inflation is, in fact, way down from its recent peak, some grocery prices have fallen, and because wage growth has been strong, grocery purchasing power is up. Specifically:
- While the level of grocery prices is high relative to before the pandemic, wages have also increased so that it takes about the same number of hours (3.6 hours) for an average non-managerial worker to buy a week’s worth of groceries as in 2019.
- Because wage growth has outpaced grocery price growth, it takes slightly less work to purchase a bag of groceries relative to a year ago.
- 27% of the grocery basket saw price declines over the past year, about the same as the average since 2000.
- Some of the most prominent grocery retailers, including ALDI, Amazon, Target, Walgreens, and Walmart recently announced price cuts, which may not have shown up yet in the data.
To assess the pressure of high grocery prices on family budgets, we examine their magnitude relative to household paychecks. Figure 1 shows how many hours of work it takes for an average, non-managerial worker to buy a typical week’s worth of groceries. Because real wages have been rising as grocery inflation has been falling, this measure is down over the past year and is roughly back to the number of hours it took in 2019 (3.6 hours), and still a bit below the 2015-2019 average.[2]
Table 1 makes the same point using the most recent data on grocery costs and hourly pay of mid-wage workers. The nominal price of weekly grocery purchases for a typical family rose by $1.11 over the past year. But the hourly wage grew faster, and is up $1.20. Thus, it takes slightly less work at this higher wage to buy weekly groceries. This ongoing trend—wage growth exceeding grocery price growth—explains why the slope and the end of Figure 1 trends down at the end of the series.
Figure 2 shows two measures of the breadth of the cooling in grocery prices. First, we calculate the share of all 53 items that make up the CPI grocery basket which have declined over the last year, weighted by their share of expenditures in the total basket of CPI groceries (dark blue line of Figure 2). Second, we calculate the weighted share of items with year-over-year prices increases that are smaller than at the same time the year before (light blue line). The first can be thought of as a measure of how widespread grocery price deflation is and the second how widespread grocery price disinflation is.
In May 2024, 27% of the average consumer’s grocery bundle had experienced an outright price decline over the last year. Further, 77% of the grocery basket has experienced less inflation this year than last year.
Table 2 provides another take by showing the major contributors to grocery inflation at both its peak and last August. All major categories have come down significantly off of the peak, and most have fallen further over the past year. One of the largest declines over the past year was in cereals and bakery products (13% of grocery consumption), going from 0.8 ppt contribution to grocery inflation last year to 0.1 ppt this year.
Next, Figure 3 gives the ten largest price declines in CPI grocery items over the last year. This was led by apples, which experienced a 13.2% decline, followed by ham (-5.4%) and cheese (-3.4%). Potatoes, milk, and coffee also experienced yearly declines in prices. Other grocery items increased in price over the past year, including peanut butter, bacon, and some meats.
As President Biden repeatedly says, families are still struggling with high prices, which is why we continue to push for lower costs in all the components of family budgets, including housing, health care, child care, and getting rid of junk fees. Of course, grocery prices are high on that list and it is therefore good to see relief coming in that important space. However, as shown in the last figure, markups in the grocery sector—the prices charged above operating expenses—rose after COVID and have remained high whereas other retailers’ margins have reverted back down to pre-pandemic levels. As the economy continues to normalize after COVID, there is still room for margins in this sector to recede, and for those lower markups to be passed along to consumers in the form of further grocery price relief for American households.
[1] See the Bureau of Labor Statistics’ Consumer Expenditure Survey data for 2022 by demographic groups, table 1101.
[2] We use the most recent data available on the typical grocery basket, from the 2022 Consumer Expenditure Survey which we adjust over time using the CPI grocery price index.Average grocery expenditures reported by non-managerial workers are converted weekly figures, and then to nominal dollars in each period using the index.The nominal cost of the basket of groceries is then divided by nominal average hourly earnings for production and non-supervisory worker in the same period, to get the cost in hours of work.
