OPINIONRetailers

Don't Worry About High Prices, Worry About the Recession That May Lower Them

Despite the recent spike in food prices, conditions could be aligning for deflation, the author says
Photograph: Shutterstock

April’s food-at-home index garnered a lot of attention after it posted the largest monthly rise since 1972, which has prompted many to ask, “Is this a trend or a blip? And, when will it end?”

I don’t pretend to have a crystal ball, so I will avoid the sort of predictions that are cringeworthy in a year’s time. Instead, I will focus on what we are looking at when trying to make sense of what is going on in the market today.

Breaking Things Down

To show just how wacky things are, let’s first look at macroeconomic indicators in the U.S. that under normal circumstances would lead to some level of food-price deflation. The two main drivers are the strong dollar and low oil prices, each acting in a different manner that I will unpack briefly:

  • A strong dollar: This makes imports cheaper—so that everything from noodles to luxury cars should cost less—and exports more expensive. A surfeit of domestically produced goods should translate into lower prices as well.
  • Cheap oil: If the cost of oil decreases, then the cost of manufacturing plastics, synthetic materials or chemical products will also fall, some of which can be passed onto consumers.

So even though the crisis has A) strengthened the dollar (because investors use it as a safe harbor) and B) depressed oil prices to historic lows, reaching negative values in March, we have a record price increase in April.

Now unless you have been living under a rock, you know why this is happening. On the one hand, demand has surged. With most of the country in lockdown, most meals are being prepared at home as restaurants shut their doors and grocery shopping has been one of the few outlets people have to get out of the house and spend money.

On the other hand, restrictions in supply have driven prices to rise, due to peaks in demand and production shortages due to the spread of COVID-19 in the food production system.

On top of this, many retailers have been scaling back the number of promotions they run both to ensure they can meet the surge in demand and because they don’t need to stimulate any more demand.

Looking Ahead

So what does this mean for the rest of the year and 2021? I said I wouldn’t go falling into the trap of making predictions. Instead, let me unpack the factors involved.

Driving prices up will be things like COVID-19-related policy decisions; how long will the lockdown continue; will there be a second wave of the virus and will a second wave impact how consumers demand for products and how retailers supply them?

Driving prices down will be things like the softening of retail sales driven by the opening of the economy and increased competition for a share of people’s stomach, along with a drop in demand because of high unemployment and the recession. These two factors combined with the macro indicators I outlined at the start of this piece could eventually lead to a price war between retailers as we saw during the Great Recession. If retailers look to protect top-line sales by investing part of the windfall they have received during COVID-19 and commodity prices drop, we could be looking at the perfect deflationary storm.

Which of these factors will win out and how long will they last is anybody’s guess, but with so many interconnected pieces the next six months will at the very least be volatile ones.

Jose Gomes is president of North America for dunnhumby, responsible for leading growth and customer success for retail and brand partners.

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