Food Deflation Anticipated: Walmart CEO Foresees Price Drops

Food Deflation Anticipated: Walmart CEO Foresees Price Drops

Deflation, often described as the opposite of inflation, occurs when an increasing supply of goods and services is met by a constant or slowing money supply.

Walmart’s president and CEO, Douglas McMillon, foresees an upcoming phase of food deflation in the US. He expressed this during an earnings call last week, saying that he’s expecting “a period of deflation in the months to come,” adding, “While that would put more unit pressure on us, we welcome it because it’s better for our customers.”

He mentioned that although beef prices remain high, there has been a noticeable decrease in the cost of eggs, dairy, chicken and seafood. Additionally, he anticipated that both the company and the broader economy will undergo a period of deflation in the areas of dry groceries and consumables.

Before delving into Walmart’s finances and why McMillon and his colleagues anticipate price drops, we first need to understand what food deflation is and its causes and effects on the broader economy.

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What is Food Deflation?

The primary cause of deflation, including that affecting food prices, is a reduction in the money supply or financial instruments. Central banks, such as the Federal Reserve, significantly influence this through their monetary policies. When the money and credit supply decrease without a corresponding drop in economic output, prices, including those of food, generally decline. 

Other factors causing declining prices include reduced overall demand for goods and services and increased productivity. Reduced demand can stem from lower government spending, stock market downturns, increased consumer savings or tighter monetary policies. On the other hand, increased productivity, particularly due to technological advancements, can also lead to food deflation. As companies become more efficient, production costs decrease, and these savings are often passed on to consumers as lower prices.

This effect of productivity on price deflation can vary by industry. For instance, in the technology sector, advancements have dramatically reduced the cost of data storage over the decades. The cost per gigabyte of data, for example, plummeted from $437,500 in 1980 to mere cents by 2014, leading to lower prices for technology products. Similar trends can be observed in the food industry, where technological improvements in farming, processing and distribution have contributed to falling food prices.

How Food Deflation Could Impact Walmart

During the post-pandemic period, grocery prices have seen some of the most significant increases, with a 24 percent rise since the onset of the pandemic, according to the Federal Reserve. But this inflation trend is showing signs of slowing down. Since January, the price increase for groceries has been just two percent. Overall inflation is also on a downward trajectory, reaching its lowest annual rate since September 2021 at 3.2 percent in November.

Several economists caution that extended, severe deflation can adversely affect the broader economy. Deflation can lead to higher unemployment rates, as businesses earn less revenue to compensate their workforce. It can also result in increased interest rates due to the escalating real value of debt and may even trigger a recession by suppressing production, wages and demand.

Walmart, with approximately $600 billion in US sales in 2022, stands as the nation’s largest retailer, according to data from the National Retail Federation. It is anticipated that groceries will account for over half of these sales, underlining the significance of this sector in the company’s overall performance.

John D. Rainey, chief financial officer, commented on the same earnings call, “While we’re pleased with our top-line results, operating income was below our guidance due to higher-than-anticipated expenses, largely certain legal accruals. Constant currency sales increased 4.4 percent or nearly $7 billion. Importantly, we saw traffic growth across both in-store and digital channels.”

Rainey highlighted Walmart’s grocery sector growth in the US, mentioning a slowdown in grocery inflation from the second quarter but an overall elevation on a two-year basis. He also mentioned fluctuating sales in November, leading to a more cautious outlook on consumer behavior. He anticipated a moderation in sales growth in the fourth quarter as food deflation brings grocery inflation closer to historical norms.