By: Brian Tesch Advertising Manager
Here’s some good news for consumers, the USDA’s Economic Research Service report marks August as the ninth consecutive month of food deflation. The total 9 month decrease in food prices averaging -6 percent overall. With August being the largest decline, a whopping -1.8 percent, this food deflation anomaly does not appear to be slowing down anytime soon. What is causing such an unprecedented event? And why should we care?
Looking into the past, food deflation has been fairly market reliant. More specifically, it’s generally caused by some sort of recession. In 2009, grocery stores ran more sales in the months following, resulting in a form of food deflation. This isn’t a mystery. There were financial hardships and consumers were buying less food. You can probably guess that the biggest food deflation in U.S. history was during the great depression. Again, that shouldn’t be a surprise to anyone.
Considering the past, the current deflation should be puzzling. While the answer is probably more complex than we can speculate, current deflation is most likely being caused by low oil prices. With low oil prices, transporting food just got cheaper, therefore stores are able to charge less. This makes this food deflation another benefit for the U.S. economy brought to you by cheap oil.
That’s good news for college students because it’s going to be easier to find good deals at your local supermarket. But be careful, this food deflation is not benefiting everyone…
Food deflation, due to transportation costs, is actually becoming a huge problem for smaller grocery stores and food chains. Stores like Walmart that rely on transportation to move most of their food across their vast and complex distribution networks are now at a huge advantage. With the cost of transportation plummeting, stores like Walmart are able to charge less and less for their food and outsource more strategically across the country. While this is causing the national food deflation, the source of the downward pressure on pricing is not shared equally among grocery stores. This is a big problem because there is a huge difference between lowering your prices because you can, and lowering your prices because you have to.
This market environment is creating huge headaches for local mom and pop stores competing in towns with larger retailers. Even large billion-dollar retail companies such as Kroger, Whole Foods and Sprouts are starting to see their margins decrease and their stock plummet due to this change in market environment. Meanwhile, giant retailers such as Walmart and Aldi are taking over with the help of discount oil. Even Lidl, a German supermarket giant, has started to build three massive distribution plants on the east coast with the plan of opening its first U.S. stores in 2018. Amazon, being Amazon, has started AmazonFresh and is now delivering fresh groceries to your door if you live in a large city; and no, you cannot get your scup and veggies delivered via drone.
What does this mean? The longer food prices continue to decrease, the harder it will be in the future for a large local grocery store to compete with the new corporate market.
Contact the author at btesch14@wou.edu
