Food Prices Remain High: Insights from UBS Analyst Paul Donovan

Food prices, while no longer rising as rapidly, are expected to remain at higher levels than in the past, and a meaningful decline is unlikely, according to UBS analyst Paul Donovan.

Most of the costs consumers pay occur after food leaves the farm. For instance, in the UK, farmers recently received only about a third of the retail price for milk, with processed food margins being even smaller. This suggests that any price declines would depend on cost reductions further down the supply chain.

One potential source of savings is labor costs. The adoption of self-service checkouts, for example, effectively reduces staffing expenses, as consumers “work for the retailer for free,” Donovan noted.

Profit-led inflation, where companies expand margins to drive price increases, has already plateaued. Analysts point out that U.S. retailers' profit share of retail GDP grew from 12% in 2019 to 21% today. For prices to fall, retailers would need to actively reduce margins and pass those savings on to consumers.

Consumers may eventually accept current price levels as the new norm. Shoppers typically hold a “fair price” in mind for about 18 months before adjusting expectations. Over time, the perception of high prices fades, and the current price point becomes accepted.

While food inflation has eased, the structural costs behind food production and distribution make significant price declines challenging.