Retailers Remain Cautious as Inflation Continues

The Consumer Price Index for food-at-home showed a modest rise in November, depicting further evidence that inflation is returning to grocery aisles. However, the pace of increased retails as compared to rate of rising input costs suggests retailers are passing inflation along very cautiously, an analyst said.

The CPI’s food-at-home index, a proxy for inflation at U.S. grocery stores, indicated prices were up by 0.6% as compared to November of last year, according to the Bureau of Labor Statistics. The modest gain marked the fifth straight month of year-over-year increases following a lengthy period of declining prices.

Earlier this week, the labor bureau’s producer price index, or what grocers are paying for food, indicated inflation was rising considerably faster than retail prices. That could slow comp growth and have negative margin effects on grocers and illustrates they have been careful in raising retails amid a frothy competitive market, particularly those with a strong Walmart presence, according to Karen Short, a Barclays analyst.

“We believe Walmart’s price investments and better execution combined with Aldi and Lidl’s growth and Amazon’s stepped-up efforts in grocery are all weighing on food retail prices,” explained Short in a research note. “As a result, while cost inflation accelerates, retail inflation is lagging, and this is leading to comp and margin pressure, particularly in markets today with Walmart – since we believe Walmart is the primary force weighing on retail prices. Therefore, we believe markets with heavy Walmart exposure will experience the greatest pressure in the near-to-mid-term on comps and margins – so, the Eastern U.S. is relatively worse positioned while the Western U.S. should be relatively better off.”

The CPI for meat, poultry, fish, and eggs rose 1.4% as compared to a year-ago, the largest year-over-year gain among food-at-home categories. Indexes for dairy and related products and nonalcoholic beverages were unchanged, while the index for cereals and baked goods was down from last year.

The November CPI showed a slight decrease in the rate of inflation it recorded in October, with four of the six major categories seeing slight sequential decreases including nonalcoholic beverages, fruits and vegetables, meats, poultry, fish and eggs; and cereal and bakery products.