Brace Your Budget: Grocery Inflation Is Set to Accelerate

Food inflation has only risen 2.5% over the past 12 months. (Angela Weiss / AFP via Getty Images)

Key Points

• U.S. food inflation rose 2.5% over the past 12 months, but it is expected to climb to between 3.5% and 4% next year.
• Higher energy prices, elevated tariff rates, and El Niño threaten to limit agricultural supply and raise food prices.
• Rising food costs could squeeze household budgets and help spur Federal Reserve officials to further increase interest rates.

The cost of groceries has been surprisingly stable in recent months, but don’t expect that calm to last. Inflation is expected to climb again over the next year, with households and policymakers bearing the brunt.

Overall food inflation, as measured by the consumer price index, has been relatively stable in recent months, with flat monthly growth in September after a 0.1% advance in both July and August. Over the past 12 months, food inflation has only risen 2.5%, below the overall pace of 3.7% year over year headline inflation in September.

But that slower pace of rising food prices is set to end. Higher energy prices, particularly diesel costs, are feeding into transportation expenses even as elevated tariff rates have raised costs for many of the components in food packaging. Moreover, El Niño threatens to upend agricultural production in the Western U.S., Mexico, and South America in the coming months, which could limit supply and raise prices.

“There is a little slice of relief for food currently, and folks should enjoy it while it lasts because these higher energy costs and some other factors are going to filter in by the end of the year,” says Ricky Volpe, a prominent professor of agribusiness at California Polytechnic State University in San Luis Obispo.

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The U.S. is on track to see food inflation of 3.5% to 4% next year, Volpe tells Barron’s. That’s still far from the last bout of peak food inflation, which rose 11.4% year over year in August 2022.

“It’s not runaway food price inflation, but food prices are continuing to go up at a time where I think people want them to go down,” Volpe says. For context, U.S. food inflation has averaged approximately 2.8% annually over the past 30 years.

The higher expected food prices could squeeze household budgets, particularly for lower- and middle-income families already struggling with higher costs of living.

However, it likely won’t significantly affect aggregate consumer spending levels—especially since much of the momentum has been fueled by wealthier households. Last year, the bulk of aggregate spending was done by the wealthiest families, with those in the top decile of wealth spending $136,000 on average, accounting for 27.9% of the total expenditures, according to the Federal Reserve’s 2025 Survey of Consumer Finances. American families in the bottom quintile of wealth spent an average of just $23,400 in 2025.

But higher food costs are not something that the Federal Reserve can shrug off, especially if demand holds up. Economists generally look through short-term shocks to specific products, such as when a severe outbreaks of avian influenza sent egg prices soaring nationwide in early 2025. Broad-based food inflation, however, is another story.

Many Fed officials routinely cite core inflation, which excludes food and energy costs, because it has been shown to more accurately reflect price growth trends over time. However, the Fed’s official 2% inflation target is based on the annual change in the overall personal consumption expenditures price index. That means food inflation cannot be dismissed.

The biggest threat to food prices in the coming months continues to be the ongoing energy shock. Brent crude oil futures hit a high of $110 a barrel this week, while West Texas Intermediate crude oil reached a high of $101 per barrel.

Persistently higher energy prices have certainly driven up consumer inflation, but they had an even bigger impact on producer prices in September. The producer price index, which tracks wholesale inflation, rose 1.3% on the month in September—the fastest pace in more than four years.

Within the producer price data, wholesale food costs were up 1.2% month over month, reversing three months of declines. Additionally, the September retail sales report also showed a rise in grocery spending, suggesting that Americans are spending more on necessities as prices climb.

“The producer price index for September showed clear evidence of rising wholesale prices in energy, transportation and food that will result in thinner producer margins and costs being passed downstream to American households,” writes Joe Brusuelas, chief economist for RSM US LLP.

Higher diesel prices first hit farmers during the planting season and continued to plague the agricultural sector during the summer harvest, Brusuelas says. “Eventually, all eyes will be focused on agriculture and grocery prices, which are likely to rise because of the limited availability of fertilizers earlier this year and the recent jump in transportation prices,” he adds.

The U.S. has not seen the full impact of those higher fuel prices yet, Volpe says. “The food system is energy-intense and most food companies operate on thin margins. So I’m a little surprised we haven’t seen higher inflation yet, but we will. I think food price inflation has to accelerate,” Volpe says.

Expect the passthrough of higher energy prices to hit highly perishable food categories first. Prices on fresh whole chickens, for example, rose 3.9% month over month in September, reversing two months of declining price growth. Similarly, prices for fresh fruits and vegetables were also up in September after two months of outright declines.

To gauge the broader scope of the potential inflation risk to food prices, Volpe is carefully watching where corn yields and prices end up this season. “It looks like we’re having a strong yield, not as strong as last year, but nothing to worry about. But nevertheless, prices may end up being problematic, because this is the crop that was planted with the higher energy and fertilizer crop prices that came as the result of that initial outbreak of the conflict in Iran and the closure of the Strait of Hormuz,” Volpe says.

If it turns out that the U.S. has substantial increases for field corn prices grown throughout the U.S., that’s going to filter into higher food prices for at least three to six months at the start of 2027, he says.

Tariffs are another, albeit less impactful inflationary pressure on food prices. Direct food tariffs have not had the impact that many initially feared. But there’s an ongoing cost pressure that is worth considering and is likely starting to affect food prices, Volpe says. Tariffs remain in place for some of the key building blocks for the food supply chain, such as steel, aluminum, paper, and cardboard.

“That’s not going to affect the food system overnight, because food companies have been working off of inventories and doing their best to make substitutions and relying on domestic supply. But that can’t last forever,” Volpe says.

El Niño, a weather phenomenon that typically results in wetter and cooler conditions in the Western and Southwest portions of the country, poses another threat to food prices. The current conditions are already tracking as one of the strongest El Niño events on record. If the rains start early or run late, that could result in a large swath of stunted growth, as well as higher instances of mold and crop affecting leafy greens, berries, grapes, and nuts.

“That’s absolutely going to have an impact,” Volpe says, but adds it’s one the U.S. probably won’t experience the effects from until mid-2027, given the timing of the planting and harvest cycles.

Already, there is mounting frustration nationwide over higher costs of living. For instance, the University of Michigan’s consumer sentiment index hit its second-lowest level ever in October. Rising food costs certainly won’t help improve consumer pessimism—and could help spur Fed officials to further increase interest rates if the situation proves broad-based.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

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