- The U.S. Bureau of Labor Statistics' Consumer Price Index confirms widespread grocery industry observation that food deflation has been gradually subsiding, down 0.2% in May compared to 2016, according to Supermarket News. This is improved from a drop of 0.8% in April, and could signal impending grocery inflation.
- CPI's fresh produce index showed 1.5% gains in May, up from 1.4% in April, with fruit prices gaining 0.3%. Proteins were still deflationary, down 2.1%, but improved from April's 3% decline, with beef still falling 4.2%.
- Dairy became inflationary at +0.4% in May compared to down 0.2% in April, and eggs remained deeply deflationary, dropping 14.5%.
Food price deflation has been a long-term problem plaguing the grocery industry. In 2016, food retailers experienced an 11-month span of year-over-year sales declines — one of the worst drops in more than sixty years.
Much of this deflation is connected to the strength of the U.S. dollar, which has slowed exports and boosted imports. California's drought, bird flu outbreaks and smaller-than-expected cattle herds also spurred price escalations, worsening the problem.
Fierce competition among grocers, especially discounters, has fueled food price deflation. As expanding retailers such as Aldi begin to amass more market share and newcomers like Lidl threaten to disrupt the grocery space with deep discounts on premium products, grocers have slashed prices on commodity products including meat, eggs and dairy to pass on cost savings to customers.
The findings by the U.S. Bureau of Labor Statistics could suggest things are starting to turn around. The Producer Price Index, which monitors retail input costs, saw gains of 1.3% in May. This could mean good news for comparable store sales, but could also cause margin pressure as prices normalize, according to analysts.
Now that prices are increasing, grocers need to leverage specials and promotions to get customers to start paying normal prices again. Digital coupons could be a good avenue for this as today's shoppers prefer digital to paper coupons. It will be interesting to see how shoppers respond to price hikes and if consumption of certain commodity products will decrease as costs rise.