Will food costs keep eating up consumer budgets?

While inflation has leveled out, food costs continue to take a big bite out of the household budget.

Americans have been spending more than 11% of their after-tax income on food—reaching levels similar to the 1980s, according to the U.S. Department of Agriculture. That spending is divided nearly equally between eating at home and eating out, the combined cost of which jumped 25% from 2019-23. 

However, there may be relief ahead. Food inflation broadly appears to be slowing. Grocery prices stayed flat from February to March, with notable decreases in butter, cereal and bakery products, according to the latest Consumer Price Index. Retail prices on dairy, flour, breakfast cereal, rice and pasta dropped over the past 12 months, while beef, chicken and bakery products increased. 

While sticker shock at supermarkets has diminished, restaurant prices have been slower to come down. The CPI’s “food away from home index”—which includes food purchased from restaurants, fast food chains and other eating establishments—rose 4.2% from March 2023 to March 2024, compared to a 1.2% rise in the “food at home” category.  

This disconnect between food at home inflation and food away from home inflation illustrates an important dynamic happening broadly in the economy right now. Food pricing is complex because it reflects not only commodity prices, but also the cost of bringing food to market, like labor, transportation and packaging. 

In 2020 and 2021, the Coronavirus pandemic shifted consumer behaviors and snarled supply chains, sending food prices skyward. Those effects were compounded in 2022 by an avian flu outbreak impacting egg and poultry prices, and also the war in Ukraine pushing up global energy costs.

As supply chain strains eased over the last couple years, price inflation for goods also eased. The USDA Food Price Outlook now forecasts slowing food inflation in 2024, predicting a 2.4% rise in all food prices in 2024.

However, a new dynamic has emerged regarding consumer demand. Consumers have moved their purchasing preferences from goods to services. Rather than making dinner at home, consumers increasingly prefer to eat dinner at a restaurant. They value the service and ease of having someone else prepare meals for them. Eating at a restaurant also reduces food waste and takes less time for the consumer. And people enjoy the social component of the dining out experience. 

However, eating away from home adds extra service costs to the price of food. After all, those cooks, servers and dishwashers need to be paid. And a persistent labor shortage has caused labor costs to increase, as wage growth has accelerated. The result is that food away from home inflation now exceeds the inflation of food at home. 

Families with the lowest incomes have been hit hardest by rising food prices. In 2022, households in the lowest income bracket spent just over $5,000 on food, representing nearly a third of their income, while households in the highest income quintile spent nearly $16,000—about 8% of their income. 

Rising inflation remains one of the biggest challenges to the economy, and the Federal Reserve is determined to achieve its mandate of broad price stability. Historically, goods inflation has been easier to tame than service inflation. And this seems to be true again in the current economy. The stubbornness of food inflation is an example of how the path back to normal can be bumpy. λ