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Competition may dampen the return of grocery inflation

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Competition may dampen the return of grocery inflation

Grocery prices are continuing to rise, but it might not be time for supermarket operators to rejoice just yet.

For the third month in a row, the "food at home" component of the Consumer Price Index, or CPI, increased in September on a year-over-year basis, even as the monthly price changes compared with August were mixed, according to a new analysis by S&P Global Market Intelligence.

On its own, that might signal more pricing power for U.S. grocers, which were squeezed earlier this year by historic food deflation. But fierce competition in an industry that includes players such as Amazon.com Inc.'s Whole Foods Market Inc. and Wal-Mart Stores Inc. may mean food retailers will have to keep prices low to stay alive.

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Between August and September, the prices of nonalcoholic beverages and beverage materials increased 0.4%, the most of six product-specific categories the CPI tracks, according to data published Oct. 13 by the U.S. Department of Labor's Bureau of Labor Statistics, or BLS. Cereals and bakery prices gained 0.1% over the same period.

Dairy and related products prices led the declines, falling 0.6% month over month; meats, poultry, fish and eggs declined 0.4%; and fruits and vegetables lost 0.2%.

All other food at home products, a category that includes items such as candy, spreads and frozen foods, gained 0.2%. The food at home index as a whole was flat in September, compared with the 0.2% decline it posted in August.

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For the nation's largest grocers, including Kroger Co. and Wal-Mart, the increase has snapped a 19-month deflationary streak, the longest since a period between 1948 and 1950, Barclays analyst Karen Short wrote in an Oct. 13 research note.

The food at home index rose 0.4% in September on a year-over-year basis, with the fruits and vegetables category growing 1.2% over the same period, according to the BLS report.

The September results point to continued relief for U.S. grocers, which have dealt with persistent grocery price deflation over the last two years. In July, year-over-year price inflation increased for the first time since November 2015, according to BLS data.

A broad return to inflation increases profit margins for grocers since they "are now passing through some of the food price inflation to consumers," Gordon Haskett analyst Chuck Grom wrote in a research note published Oct. 13.

But rising prices may not compensate for stiff competition in the grocery industry, Barclays' Short said. With players such as Wal-Mart, Whole Foods, Aldi (Süd) GmbH & Co. and Lidl Dienstleistung GmbH & Co. KG all putting an emphasis on low prices, grocers may have no choice but to keep prices low for the near future.

Wal-Mart, the largest U.S. grocer by market share, is particularly likely to pressure prices at rivals, Short wrote, adding, "Walmart's price investments and better execution should limit the upside for food retail prices."

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.