Wholesale food inflation held relatively steady in August after several months of decline, but sharp increases in several key ingredients and packaging inputs could signal higher costs and margin pressure for some CPG food and beverage makers in the months ahead.
The Producer Price Index, which measures prices received by producers and helps gauge pipeline cost pressures, increased 0.4% in August, in line with expectations, while prices rose 5.4% year over year – slightly above estimates of 5.3% and well above the Fed’s 2% inflation target, according to data published Sept. 10 by the Bureau of Labor Statistics.
Drilling down, the index for final demand goods increased 1.1% in August – the bulk which the Labor Department attributed to a 4.2% increase in final-demand for energy, while final-demand food prices increased only 0.1%
While slight, the increase in final-demand food prices masks surging increases in key commodity groups, including grains, which jumped 4.3% in August from July. This was on top of a 14.8% increase in July from June, driving up year-over-year change to a staggering 17.7%.
The price of oilseeds also rose 3.9% month over month – a notable slowdown from the 9.5% increase from June to July, but still contributing to an accumulative increase of 15.8% year over year. Notably, finished shortening and cooking oils were up only 0.3% month over month and 6% year over year.
The increase in grains could impact companies selling snacks, bakery items, pasta and grain-based pet food. While the increase in price for oilseeds could impact manufacturers of prepared foods, sauces and dressings as well as bakery and snack items and frying operations.
A 6.1% month over month increase in confectionery end products is also notable as one of the higher jumps and in a category that has been holding relatively steady for months, even if on a general upward trajectory. From June to July, the category increased only 0.8% on top of a mere 0.1% increase from May to June. The index was up 13.6% year over year in August.
This shift is one of the biggest food-manufacturing outliers in the report and the BLS calls out the impact on candy and nuts. While the price of cocoa has been volatile, the PPI measures the selling price received by producers, not the spot price of an individual ingredient.
While not as dramatic, bakery products increased 0.3% month over month and 2% year over year, while pasta products were flat month over month and up 2.2% year over year.
Food inflation is uneven
Not all food categories are going up, however.
Meat and dairy, for example, fell. Year-over-year, the PPI for pork dropped 13.9% and processed turkeys were down 23.6%. Dairy also fell 0.7% year over year.
Likewise, milled rice dipped 0.1% month over month and 4.3% year over year, according to BLS.
Packaging could become more expensive
While not as dramatic as the increases for some agricultural commodities, elevated – but not accelerating – plastic packaging and rising paper packaging producer prices could create meaningful pressure in the coming months.
Year over year, plastic is up more than paper inputs, but BLS reported declines in some categories in August. For example, unsupported plastic film/sheet is up 12.5% for the year, but down 0.5% for the month. Likewise, plastic resins and materials are up 6.6% for year and down 0.8% for the month. Finally, plastic packing products are up 6.2% for the year and down 1.1% for the month.
Paper is a different story, with some categories showing renewed monthly acceleration. Paperboard is up 2.3% month over month and 5.1% year over year, while paper boxes and containers are up 1.6% month over month and 4.1% year over year. This makes it a legitimate cost concern.
The biggest broad-based risk
The tremendous jump in PPI for diesel and the lesser but still notable uptick in truck freight are the biggest broad-based inflation risks for packaged food.
With a 24.1% month-over-month and 77.8% year-over-year increase, diesel fuel prices received by producers is by far the biggest factor potentially squeezing margins and possibly driving up consumer prices in the future. According to BLS, more than a third of the August increase in final-demand goods can be traced to diesel fuel. In addition, it attributes nearly two-thirds of the increase in processed goods for intermediate demand to the month-over-month increase in diesel.
From farm to fork, higher diesel and freight costs can put pressure on multiple links in the food supply chain.
Closely related is freight, including final-demand transportation and warehousing services, which increased 2.3% in August and truck transportation of freight which increased 2% month over month.
What happens next?
Taken together, the August PPI data point to a potentially challenging cost environment for some packaged food and beverage companies, even though overall food inflation remains relatively contained. Commodity costs are rising sharply in several important categories, paper packaging is showing renewed pressure, and diesel and freight costs are increasing across the supply chain.
The immediate impact on margins will depend on how quickly those higher costs flow through to individual manufacturers and whether companies can offset them through pricing, reformulation, productivity gains or other cost controls. But the August data suggest that input-cost pressures could become a more important issue for CPG companies in the months ahead.
