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The Club PUBlication  06/20/2022

6/20/2022

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​HOW INFLATION GETS BAKED IN
Not just ingredients, but related costs elevate price of loaves on store shelves.
By BROOKS JOHNSON • [email protected]

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The cost of groceries jumped 14% in the past year in the Twin Cities, and food inflation may keep getting worse before it gets better.  A loaf of bread helps explain why.

Bread has just a few ingredients — wheat, water, yeast, salt, maybe sugar — and the average price of a loaf has tracked closely to overall inflation in the past 40 years.And while the war in Ukraine and climate extremes have pushed wheat prices to their highest levels in 15 years, it's the components not listed on the ingredients label that are driving up the price of bread — and all food for that matter.

"The actual cost of wheat in a loaf of bread might only amount to a couple of slices," said Michael Boland, agribusiness professor at the University of Minnesota's College of Food, Agricultural and Natural Resource Sciences. "It's not like a head of lettuce where you take it out of a field, wash it and it's on a shelf."
The other costs baked into the price of a loaf, he said, include things like packaging, labor, energy and transportation — all of which are more expensive now.

So even when the price of wheat and other raw ingredients stabilize, high food inflation could linger into next year. "These shocks are going to be here for a while," Boland said, but it's anyone's guess as to how much higher food prices will go, or how long they keep rising.

"The high prices we're seeing for wheat are probably going to be sustained at least through the end of the growing season," Joe Mahon, regional outreach director at the Minneapolis Fed, said June 1. "Does that necessarily mean the price of a loaf of bread is going to keep going up? I don't know, because some of the pressure from elsewhere in the supply chain might end up being relieved."

Energy, transportation, packaging and "all these other parts of production, that's where a lot of inflation in food is, even though crop prices are up," he said.


ENERGY
Higher gasoline and diesel prices make it more expensive to move wheat, flour and bread from farm to store shelf. Food makers are passing along fuel surcharges to customers to offset those costs, Boland said, forcing retailers to pass on increased prices to consumers.
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At factories and warehouses, it's getting more expensive to keep the lights on, ovens hot and buildings cool as electricity costs increase.  The higher cost of natural gas — a key ingredient in synthetic fertilizers — also means higher costs on the farm that need to get recouped.

Among all the items considered in the producer price index — which measures business inflation — energy prices have increased the fastest. Businesses were paying 45% more for energy in May compared to the year before, according to the Bureau of Labor Statistics, while costs overall were up 11%.

LABOR
Like many industries, food manufacturers are short-staffed. As a result, wages are going up to recruit workers, and suddenly the cost of making bread is that much more expensive.

"These are extremely tight labor markets," Mahon said. "It's hard to find people, so starting wages are going up, and that's leading to wage increases across the board."

Consider how many hands touch all the ingredients in a loaf of bread, from the farmer to the cashier — each likely getting paid more than they were a year ago.
Transportation

A combination of labor and energy issues, the cost to haul cargo across country or even across town has exploded in recent years.

TRANSPORTATION
Long-distance trucking costs have jumped a staggering 70% over the past two years, according to the Bureau of Labor Statistics, after rising a combined 35% over the previous 20 years.


As of May, average transportation and warehouse costs for businesses had risen 24% over the year before. That's just the cost of bringing finished goods to market, like trucking a loaf of bread to a grocery store. The cost to move wheat and flour between farms, mills, warehouses and bakeries is also up, on average, 16% over the past year.

PACKAGING
Plastic bread bags are also affected by increased costs to produce and ship due to energy and labor. And the persistently high price of oil, which keeps setting records, directly translates into higher prices for petroleum-derived plastics.
Raw ingredients

A major spike in the price of wheat doesn't cause an equally large spike in the cost of a bread loaf. That's because a significant swing in the price of abundant commodities like wheat often translates into just a few cents' difference.
What's more, major buyers and sellers enter long-term contracts that keep prices fixed for a set period.

So major bread manufacturers have had that cushion through this spring's volatile wheat prices. As new contracts are negotiated, however, costs are likely to rise for bread makers and other food companies, foretelling increased prices for consumers.

"Because of the nature of risk management [such as supply contracts and hedging] these effects will take a little longer to show up."  Boland said. "Prices are far more volatile at the producer end. The further away you are from the consumer, the more volatile prices are."  Volatility is key to understanding food inflation — prices go up, but they still occasionally come down.

"It's not necessarily the case that once the price of bread goes up it's never going to come back down," Mahon said. "That's a little bit of good news."

Joe Mahon, Minneapolis Fed

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The Club PUBlication  06/13/2022

6/13/2022

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​IT’S NOT YOUR IMAGINATION; PACKAGES ARE SHRINKING

Manufacturers find smaller sizes are less noticeable to consumers than price hikes.
By DEE-ANN DURBIN Associated Press
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Kleenex boxes now contain fewer tissues as a way for its manufacturer to cope with inflation, a strategy that is being employed by a growing number of companies in the US.
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It's the inflation you are not supposed to see. From toilet paper to yogurt and coffee to corn chips, manufacturers are quietly shrinking package sizes without lowering prices. It's dubbed "shrinkflation," and it's accelerating worldwide.

In the U.S., a small box of Kleenex now has 60 tissues; a few months ago, it had 65. Chobani Flips yogurts have shrunk from 5.3 ounces to 4.5 ounces. In the U.K., Nestlé slimmed down its Nescafe Azera Americano coffee tins from 100 grams to 90 grams. In India, a bar of Vim dish soap has shrunk from 155 grams to 135 grams.

Shrinkflation isn't new. But it proliferates in times of high inflation as companies grapple with rising costs for ingredients, packaging, labor and transportation.

Global consumer price inflation rose an estimated 7% in May, a pace that will likely continue through September, according to S&P Global.

"It comes in waves. We happen to be in a tidal wave at the moment because of inflation," said Edgar Dworsky, a consumer advocate and former assistant attorney general in Massachusetts who has documented shrinkflation on his Consumer World website for decades.

Dworsky began noticing smaller boxes in the cereal aisle last fall, and shrinkflation has ballooned from there. He can cite dozens of examples, from Cottonelle Ultra Clean Care toilet paper, which has shrunk from 340 sheets per roll to 312, to Folgers coffee, which downsized its 51-ounce container to 43.5 ounces but still said it will make up to 400 cups. (Folgers said it's using a new technology that results in lighter-weight beans.) Dworsky said shrinkflation appeals to manufacturers because they know customers will notice price increases but won't keep track of net weights or small details, like the number of sheets on a roll of toilet paper.

Companies can also employ tricks to draw attention away from downsizing, like marking smaller packages with bright new labels that draw shoppers' eyes.

That's what Fritos did. Bags of Fritos Scoops marked "Party Size" used to be 18 ounces; some are still on sale at a grocery chain in Texas. But almost every other big chain is now advertising "Party Size" Fritos Scoops that are 15.5 ounces — and more expensive.

PepsiCo didn't respond when asked about Fritos. But it did acknowledge the shrinking of Gatorade bottles. The company recently began phasing out 32-ounce bottles in favor of 28-ounce ones, which are tapered in the middle to make it easier to hold them. The changeover has been in the works for years and isn't related to the current economic climate, PepsiCo said. But it didn't respond when asked why the 28-ounce version is more expensive.

Likewise, Kimberly-Clark — which makes both Cottonelle and Kleenex — didn't respond to requests for comment on the reduced package sizes. Procter & Gamble Co. didn't respond when asked about Pantene Pro-V Curl Perfection conditioner, which downsized from 12 fluid ounces to 10.4 fluid ounces but still costs $3.99.

Earth's Best Organic Sunny Day Snack Bars went from eight bars per box to seven, but the price listed at multiple stores remains $3.69. Hain Celestial Group, the brand's owner, didn't respond to an e-mail seeking comment.

Some companies are straightforward about the changes. In Japan, snack maker Calbee Inc. announced 10% weight reductions — and 10% price increases — for many of its products in May, including veggie chips and crispy edamame. The company blamed a sharp rise in the cost of raw materials.

Domino's Pizza announced in January it was shrinking the size of its 10-piece chicken wings to eight pieces for the same $7.99 carryout price. Domino's cited the rising cost of chicken. In India, "down-switching" — another term for shrinkflation — is mostly done in rural areas, where people are poorer and more price sensitive, said Byas Anand, head of corporate communications for Dabur India, a consumer care and food business. In cities, companies simply jack up prices. "My company has been doing it openly for ages," Anand said.

Some customers who have noticed the downsizing are sharing examples on social media. Others said shrinkflation is causing them to change their shopping habits.
Alex Aspacher does a lot of the grocery shopping and meal planning for his family of four in Haskins, Ohio. He noticed when the one-pound package of sliced Swiss cheese he used to buy shrank to 12 ounces but kept its $9.99 price tag. Now, he hunts for deals or buys a block of cheese and slices it himself.

Aspacher said he knew prices would rise when he started reading about higher wages for grocery workers. But the speed of the change — and the shrinking packages — have surprised him.

"I was prepared for it to a degree, but there hasn't been a limit to it so far," Aspacher said. "I hope we find that ceiling pretty soon."

Sometimes the trend can reverse. As inflation eases, competition might force manufacturers to lower their prices or reintroduce larger packages. But Dworsky said once a product has gotten smaller, it often stays that way. "Upsizing is kind of rare," he said.

Hitendra Chaturvedi, a professor of supply-chain management at Arizona State University's W.P. Carey School of Business, said he has no doubt many companies are struggling with labor shortages and higher raw material costs.

But in some cases, companies' profits — or sales minus the cost of doing business — are also increasing exponentially, and Chaturvedi finds that troubling.

He points to Mondelez International, which took some heat this spring for shrinking the size of its Cadbury Dairy Milk bar in the U.K. without lowering the price. The company's operating income climbed 21% in 2021 but fell 15% in the first quarter as cost pressures grew. By comparison, PepsiCo's operating profit climbed 11% in 2021 and 128% in the first quarter.
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"I'm not saying they're profiteering, but it smells like it," Chaturvedi said. "Are we using supply constraints as a weapon to make more money?"
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