Chicken wings for $34? Suppressed inflation drives food costs higher – Orange County Record

Written by Aimee Ye and Tarso Veloso Ribeiro | Bloomberg

With gallons of milk up 25% since before the pandemic, and retail bacon up 35%, it’s hard to imagine how US food inflation could get any worse. But the evidence suggests higher prices are on the horizon.

Consumers have already been shielded so far from the full burden of high expenses facing producers, distributors and small businesses such as restaurants. But they can only hold back for much longer.

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 fetch close to $150. He said that expenditures for cooking oil and flour have nearly doubled in the past five months. But it’s not just a hike in the price of ingredients. It pays more for work and services too. Even the company that maintains his air conditioners has incurred a $40 fuel fee per visit. To counter this, he raised the menu prices.

An order of 15 chicken wings, a signature dish at Sal and Mookie’s Pizza, went for $13.95 before Covid hit. Now, wings costs can vary so much that they are labeled “market price,” as some restaurants do with lobster. At its peak, the list price can be around $27.95—but that’s barely a margin—and Judd estimates that the “true cost” is closer to about $34. He is trying to decide whether to continue raising prices or removing wings from the menu.

“We’ve never seen anything quite like what we’re seeing now,” said Goode, who opened his restaurants nearly 30 years ago.

The difference between the prices that producers receive for their goods and those paid by ordinary customers can be seen in the cash registers by comparing the price indices of producers and consumers.

The CPI, a benchmark for inflation mentioned in headlines and economists, has been on the rise. Government data this month showed that consumer prices for food rose 9.4% in April from the previous year, the largest increase since 1981. There were record increases in chicken, fresh seafood and baby food.

But many food costs measured in the PPI are accelerating faster than the CPI rate. In April, average wholesale food prices in the index jumped 18% from the previous year, according to government data released on May 12. This was the largest increase in 12 months in nearly five decades. The National Restaurant Association said eggs jumped 220 percent, butter 51 percent, fats and oils 41 percent and flour 40 percent.

The data suggests that pent-up inflation in the production and distribution pipeline will continue to liquidate consumer prices.

“Companies will do everything they can to squeeze margins and not pass on higher costs to producers if they see opportunities for a price reversal soon,” said Arlan Sodermann, chief commodity economist at financial services group StoneX. “However, they will eventually need to get through these price hikes.”

Price changes for foods included in the CPI basket are a month or two behind the PPI, so producers’ recent increases “will likely translate into significant price hikes that consumers see in the next few months,” said Stephen Stanley, chief economist. At Amherst Pierpont Securities, in an email.

Prices per gallon of milk are up nearly 25% since before the pandemic, and some niche markets are charging more due to inflation and supply chain issues.  (Dustin Franz/The New York Times)
Prices for a gallon of milk are up nearly 25% since before the pandemic, and some specialty grocery stores like Whole Foods are charging more due to inflation and supply chain issues causing companies to curl up. (Dustin Franz/The New York Times)

Meanwhile, pressures on food production are mounting, suggesting that the Producer Price Index could continue to rise. Farmers face a myriad of challenges, including fertilizer shortages, drought and bad weather, along with an outbreak of bird flu in the United States that has killed nearly 10% of the country’s laying hens. In addition, the war in Ukraine and its impact on fertilizer supplies and fuel markets are exacerbating the problems.

All of these factors are likely to reduce yields, livestock feed, meat and other food supplies – and contribute to further price gains.

Already in April, the USDA raised its 2022 forecast for producer price inflation for most staple foods. Farm-wide cooking and wheat oils are expected to jump about 40% this year, compared to December’s forecast for price increases of up to 5% and 4%, respectively.

Expectations of higher food prices reflect a broader trend for the US economy. A new era of high inflation is likely to prove stubbornly above the 1.5% to 2% range that US consumers, businesses and investors were used to before the pandemic picked up.

“We can expect higher inflation to be more steady,” said Fernando Martin, assistant vice president at the Federal Reserve Bank of St. Louis.

The situation also highlights why President Joe Biden has said Democrats should redouble their efforts to overcome voter anger over inflation. Just last week, Biden called inflation “unacceptably high,” but said the responsibility to combat it rests with the US Federal Reserve.

For food prices, the effect of pent-up inflation will also come from the middle of the supply chain: the distributors who stock and deliver food to restaurants and other food service groups.

Mark Allen, chief executive of the International Food Service Distributors Association, said independent distributors are seeing rising costs for everything from fuel to equipment to labor. He said inflation runs in the middle of adolescence or later among distributors.

“It’s higher than what the government is publishing,” Allen said, adding that more distributors are likely to raise rates since their margins are only 1% to 2%.

To counteract the exorbitant expenditures, restaurants have already paid some of the costs. Average menu prices in April were up 7.2% from a year earlier in the biggest gain in 12 months since 1981, according to the National Restaurant Association. Diners also saw volumes shrink.

However, the margins are severely compressed. And things could get worse because many large restaurant chains and food retailers sign long-term contracts for supplies. Since the agreements that were signed six or 12 months ago are being renewed, they are likely to be determined by the current high costs.

Even fast-food giant Wendy’s recently increased its commodity inflation forecast for this year, citing rising costs for favorites like Baconator and Dave’s Double.

Smaller, independent restaurants usually have much fewer options to protect against higher costs.

“There are staples whose price has jumped dramatically and touch every dish,” said James Mallius, partner at Amalie’s Restaurant in Manhattan. He said the prices of butter, oil and beef have risen dramatically. Disposable gloves cost about five times more than they did before the pandemic.

There is always a risk that continuing to raise consumer prices will destroy demand. That’s part of the reason why retailers and food manufacturers are “yet sensitive to raising prices too quickly,” said Brian Choi, chief executive of the Food Institute, which provides research, news and data about the industry.

But in the end, they will need to raise prices,” Choi said. “There is a lot of inflation yet to come.”

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