Rising inflation challenges consumers and the Federal Reserve
A surge in inflation – due primarily to disruptions in the Strait of Hormuz – coupled with ongoing stability in the labor market has lowered the probability that the US Federal Reserve will cut rates this summer. However, Kevin Warsh, the new Fed Chair is still expected to make a case for rate cuts prior to the midterm election. At the same time, rising energy prices pressure consumers in multiple ways. Increasing fuel and power costs negatively impact consumer budgets directly, and those same increases tend to raise the prices of all other goods, since there is an energy cost component in other goods and services. These inflationary challenges will continue to impact consumer food choices into 2027.
Inflation in the US surged from 2.4% in February to 3.3% in March, due to rising oil prices related to the Iran conflict. The ongoing disruptions in the Strait of Hormuz led to a further rise in US inflation to 3.8% in April. Meanwhile, the US reported strong nonfarm payroll data for March and April. This combination makes it highly unlikely that the Fed can justify cutting rates in the near-term months. However, Warsh and the FOMC do have a logical, analytical framework to justify rate cuts later in the year. Unlike the post-COVID inflation period, which was driven largely by excessive demand-side stimulus, the current inflation surge is purely a supply shock. Hence, the Fed could look through the high headline inflation and focus on core inflation and future inflation expectations. If only modest increases in core inflation occur in the near-term and the long-run inflation outlook remains reasonably tame, then the Fed could resume its easing bias.
US food inflation in April was at its highest level since May 2023, with higher energy costs being the primary contributing factor. Unlike the 2021-2022 inflation cycle, consumers are far more constrained than they were then. Recall the significant government stimulus packages that were aimed at supporting consumer spending during the COVID era. Now, excess consumer savings have been depleted, and most consumers are being forced to make more discerning purchase decisions on many items, including food. Lower- and middle-income consumer groups especially are shifting toward value, private label, and smaller basket sizes. Premium food segments remain relatively resilient, driven by higher-income consumer demand, while mass-market volumes weaken.
For updates on the entire food and beverage supply chain, read the North American AgriBusiness Review from RaboResearch.
Report Authors
Al Griffin
Senior Data Analyst — Coordinator of the Agribusiness Quarterly
Roland Fumasi
North America Head — Animal Protein
Christine McCracken
Senior Analyst — Animal Protein
Lance Zimmerman
Senior Analyst — Animal Protein
Steve Nicholson
North America Head — Crops
Tom Bailey
North America Head — Consumer
JP Frossard
Senior Analyst — Consumer Foods
Eric Gibson
Analyst — Sustainability
Philip Marey
Senior Market Economist — Financial Markets Research
David Magaña
Senior Analyst — Fresh Fruits, Vegetables and Tree Nuts
Lucas Fuess
Senior Analyst –Dairy
Xinnan Li
Senior Analyst — F&A Supply Chain
Pablo Sherwell
Senior Food & Agribusiness Analyst
Sam Taylor
Senior Analyst — Farm Inputs
Owen Wagner
Senior Analyst — G&A
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