What Will Stop Food Prices from Moving Higher? PCE on Thursday
PCE numbers will be released on Thursday. Food and Food Services prices will continue to move higher in my view.
Food - broadly defined - is the PCE and CPI category that I pay most attention to given that it is a necessity. I have yet to see evidence of deflation insofar as grocery prices or restaurant prices are concerned. The Fed did not break the economy this time around in order to drive prices lower after it drove prices higher 2020-2022 with its “printing press” monetary policy.
The Fed had the opportunity to break this bubble economy in March 2023 when banks pulled back on credit as a result of the SVB failure and fear of contagion, yet unfortunately we live in a bailout culture where everyone and everything is bailed out at great cost to the taxpayer (recall the Fed’s $200 billion-plus BTFP).
Back to food and PCE. I simply do not see the cost of food moving lower, regardless of month-to-month PCE movements. The price of oil would have to hit $40 in order for food input costs to move lower to the point where we would notice the price of food in grocery stores and restaurants moving lower. Recently in the suburbs of Boston I noticed that one restaurant (which is nothing special in my view), priced its beef and shellfish higher than a high quality restaurant in Midtown Manhattan that I know of. That is a real problem folks. Prices are so darn distorted as a result of the Fed’s actions in 2020-2022 that I don’t believe prices will normalize until we have adults sitting in the chair at the Fed and at Treasury. We have got to get fiscal spending under control. I can’t stress this point enough.
Here is the BEA’s food chart. The month-to-month rate of change may bounce around over the next 12 months as it has in the past, but directionally food prices will move higher in my view.
The result of prices moving ever higher is of course that consumer demand eventually stagnates which shows up in unit sales. If only we had access to unit sales activity across the U.S. economy. Lack of unit sales data is why it is important to monitor payment volumes.