Why Grocery Prices Are Falling Around the US

There have been big changes happening in grocery stores across the U.S. for several years, although shoppers would be easily forgiven if they hadn't noticed. According to the latest federal data, average prices on the most common items purchased in American grocery stores have been falling compared to inflation for 19 months in a row. That's great news for the typical consumer, but it exerts a complicated ripple effect on several important parts of the national economy.

The Bureau of Labor Statistics tracks grocery prices as part of its Consumer Price Index , a measure of inflation. The CPI gathers a "market basket" of the most commonly purchased household grocery items, including produce, meat, processed foods and toiletries, and tracks their average prices over time. Until July 2017, when market basket prices finally rose a mere 0.3 percent above the prior year, it had been almost two years since grocery prices were higher compared to the last year. According to NPR, this level of food price deflation hadn't been seen in the U.S. in about 60 years .

The most obvious effect of lower grocery prices is a win for consumers. Not only have American shoppers been enjoying smaller grocery bills recently, they've also benefited from a stronger job market and higher wages since the economic downturn that began around 10 years ago.

But lower prices at the register are not ideal for the agricultural industry, which according to the USDA accounts for 5.5 percent of the entire economic output  of the U.S. It's also having an effect on the retail industry, with establishment supermarkets competing against low-cost alternatives and even internet commerce giants.

Why are food prices falling?

Understanding the reasons behind the deflation in grocery prices requires taking a look at several broad economic factors:

• One primary cause is the fact that transportation costs have fallen in recent years, thanks to lower oil and gasoline prices. This has enabled producers, distributors and retailers to compete more on price.
• At the same time, the U.S. has been exporting less of its agricultural output. China, which is still a major importer of American food, has cut back in the last few years, leading to a glut of supply on the market.
• U.S. consumers are also changing their tastes, eating less beef, dairy and eggs, for example. Lower demand usually invites lower prices.

These factors have forced every member of the U.S. grocery food chain, from farmers to distributors to store owners, to get more competitive on prices. But the supermarket industry especially has recently become white hot as new businesses enter the fold, and the old rules of business no longer apply.

Bloomberg explained that big national retailers like Wal-Mart and Kroger - already working with extremely thin profit margins  - were increasingly ceding revenue to even lower-cost competitors like Aldi and Lidl. These supermarket chains, both from Germany, are able to compete even more fiercely on prices by taking every step to reduce waste and increase efficiency. Shoppers at these stores don't enjoy a very large selection of brand-name goods, and need to bring their own grocery bags, for example. 

Some of this cost-cutting can sound inconvenient to the uninitiated shopper, but they have had no trouble winning over enough Americans to seriously threaten the old guard of the grocery industry. Analysts predict the market share held by discount grocers like Aldi and Lidl will grow five times faster than their conventional counterparts up through 2020.

Meanwhile, yet another wrinkle in the great grocery wars came this summer as e-commerce juggernaut Amazon announced its $13.7 billion takeover of upscale food retailer Whole Foods. With a cash infusion into their struggling business, Whole Foods also got in on the price wars recently, luring new customers with lower costs as well as the convenience of online ordering and home delivery provided by Amazon. Industry analysts suspect this will only further intensify the competition among grocery retailers and producers.

So while low prices and fierce competition for grocery business are good news for most U.S. households, it's worth noting that prices are likely to reverse course and start rising again eventually. However, with all these developments in mind, figuring out exactly when that change happens is anyone's guess.