Here’s why fallout from Iran war will push grocery prices even higher

While U.S. consumers are already navigating the household budget impacts of the Iran war at the gas pumps, they could also be facing a year or more of steadily increasing grocery costs if the Middle East conflict drags on.

That was among the findings of a Purdue University analysis that predicts the broad energy shock precipitated by a sustained war could add three to six percentage points to grocery inflation over the coming 12-18 months.

Last week’s Personal Consumption Expenditure report from the Commerce Department found overall U.S. inflation shot up 0.7% on a monthly basis in March, hitting an annual rate of 3.5%. Core PCE inflation, which strips out volatile food and energy prices, rose 0.3% from February to March and came in at an annual rate of 3.2% in March.

Consumers are facing fuel costs that have reached a four-year high since the U.S. and Israel launched attacks on Iran in late February. Those increases are beginning to trickle into higher prices for a broad array of goods, as reflected in U.S. annual inflation that just hit its highest mark in almost three years.

A ‘second wave’ of higher food prices

Purdue researchers Ken Foster, professor of agricultural economics and director of the Purdue Farm Policy Study Group, and Bernhard Dalheimer, assistant professor of macroeconomics and trade, explained that because the war’s impacts originate in energy markets and crude oil that affects every link in the food supply chain simultaneously “there is no food category that is meaningfully insulated from the cost pressure.”

Food industry processes impacted by rising energy costs, per the report, include:

• Diesel fuel, which powers essentially every truck that moves food from farm to processor, processor to warehouse and warehouse to retail store.
• Petrochemicals which make up the feedstock for the plastic wraps, films, bottles, trays and containers that package virtually all processed food. When crude oil rises, packaging costs rise across all categories regardless of what is inside.
• Refrigeration — from farm cold storage through trucking, warehouse, and grocery display cases — runs on electricity increasingly generated by natural gas, the price of which has also spiked with the Gulf disruption.
• Food processing is energy-intensive: cooking, sterilization, drying, freezing and baking all require substantial direct energy inputs. These costs rise for canned goods, frozen foods, baked products, dairy and meat processing alike.

The report notes that the food supply chain is an immense and complex system and price changes that impact growers, wholesale distributors and retailers take time to find their way to price tags on grocery items.

“The result is that a commodity or energy price shock hitting farm and wholesale markets today typically takes three to six months to fully propagate to retail shelf prices,” the report reads.

How much is a gallon of gas?

On Monday, the average price of a gallon of regular across the country was $4.46 per gallon, 35 cents more per gallon than a month ago and $1.29 per gallon higher than this time last year, per AAA data. Utah drivers were paying an average $4.39 per gallon on Monday, 21 cents per gallon higher than this time last month and $1.10 per gallon more than a year ago.

“The gas pump is only the opening act,” Mark Malek, Siebert Financial CIO told Business Insider. “The real household inflation hit comes later, hidden inside everyday products.”

Malek noted that the “second wave” of economic impacts from the Iran war will not arrive at the same time but rather trickle in.

“Each one, in isolation, feels manageable,” Malek said. “Together, they represent a structural repricing of the American household budget.”