The big and painful supermarket bills have arrived for…

If you’re not Taylor Swift, you’ve probably noticed the huge increase in the price of eggs. And since you’re not Taylor Swift, you’ll be sad to know your grocery receipt won’t drop much in 2023, no matter how much the media says price pressures are easing. In fact, except for the uprising of the citizens, the inflation of the past two years has set new higher ground for prices.

In the beginning, companies that supplied grocery stores such as PepsiCo Inc. (PEP) and Coca-Cola Co. (KO) and Kellogg Co. (K) and Unilever Plc. UL raised its prices to counter the increase in costs caused by the war in Ukraine, which made raw materials such as wheat and energy more expensive, and a serious outbreak of bird flu, which caused shortages of eggs. However, despite many dissenting voices, grocery shoppers managed to beat inflation, so companies had little reason to cut back on produce.

Last year, Kellogg’s partially explained its double-digit sales increase through higher prices, and Unilever posted high profits for the same reason, despite lower volume. However, managers of the major brands’ manufacturers say they haven’t fully recovered their margins yet (“further price increases are likely to follow”), ignoring that they just achieved the highest sales growth in nearly a decade, as I recently explained to the website. Bloomberg Opinion Fellow Andrea Felstead.

The most curious thing is that world food prices are falling. According to the Food Price Index of the Food and Agriculture Organization of the United Nations (FAO), prices fell in January for the 10th consecutive month, marking the longest period of decline in the past 33 years. It is currently 18% lower than the high reached in March last year, after the invasion of Ukraine. Concurrent with this stimulus, manufacturing prices for finished foodstuffs fell 1% month over month last month, while they continued to rise for the consumer (albeit at a slower pace), according to figures from the Bureau of Labor Statistics. Consumers are now noticing higher inflation at the exit of food companies and retailers.

That’s logical. The supply chain that puts breakfasts and dinners on the table is complex. The food we buy passes through many company hands before it reaches us, and each step adds costs. The majority of every dollar spent on groceries goes to the companies that process, package, distribute and sell the food. These parts of the supply chain account for about 65 cents of every dollar spent on food, with farm production costs accounting for a much smaller portion, according to a Kansas City Federal Reserve study released in September. All of this suggests that lower commodity prices will have little impact on our food bill.

So why did suppliers and grocery companies raise prices then? The grocer is a low-margin business, where volumes make up for the meager profits from each sale. Food providers like Unilever and Kellogg’s are much better off. But besides grocery companies like Publix Super Markets Inc. (PUSH) and Kroger Co. (KR), all companies are very sensitive to price changes. During recent years of economic crisis and labor shortages, some suppliers have seen their profit margins shrink despite deflationary inflation and outright price increases. Unilever, for example, told investors this month that its price hedge stands at about 75% of inflated costs for materials, production and logistics. On the grocery side, albertsons cos. (ACI) and Kroger saw their profit margins drop sharply before they started charging more.

What happens in the grocery business rarely goes down. Michelle Buck, CEO of The Hershey Company (HSY), said this month that there has been no move to cut prices among food and beverage companies. Historically, he said, prices tended to “stay in the market as a matter of principle”. Not surprisingly, Hershey’s stock price remained near all-time highs, while the Bloomberg index of US packaged food companies outperformed the S&P 500 last year.

Catering also has the ability to keep prices high, as people still have to return to pre-pandemic levels of eating out or buying takeaway. Grocery stores would struggle to negotiate lower prices if they didn’t have a list of low-cost private labels that could take a share from the big suppliers. A small regional grocery store in the Southwest doesn’t really have the clout to demand lower prices than a multinational like Nestle SA. Nestlé can only walk away, leaving groceries with holes in their shelves.

However, major grocery companies have begun to backtrack, threatening to halt orders or demote products to the bottom shelf. Wal-Mart reportedly told suppliers of packaged goods this month that it would not agree to any further price increases. Whole Foods (WFM) asked suppliers at a virtual summit to cut prices. But these negotiations may simply keep prices stable, rather than lower costs for buyers.

So far, there has been little consumer resistance to the price hike. Unilever, which makes Ben & Jerry’s ice cream and Hellman’s mayonnaise, saw volumes drop slightly, but not enough to offset the beneficial impact of higher prices. Tyson Foods Inc. (TSN) chief financial officer John Tyson said in November that the company’s pricing actions not only offset higher input costs, but “led to higher sales for the year.” I think Jimmy Dean breakfast sandwiches are hard to replace.

That could change as higher interest rates from the Federal Reserve work their way into the economy, straining portfolios. Moreover, millions of Americans will lose emergency and pandemic-related benefits from the Supplemental Nutrition Assistance Program at the end of this month. Walmart (WMT), for example, is one of the largest providers of food stamps and could see sales increase as many people face tighter grocery budgets in March. Food insecurity, which has been on the rise for months, is almost certain to worsen.

Right now, strong consumer spending gives businesses little reason to pass the downturn on to shoppers. Whether she realizes it or not, Taylor Swift is going to have to put up with skyrocketing grocery bills along with the rest of us. And for some, the solution will be an empty stomach.

This note does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

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