The aorta of the global energy economy has been blocked for more than a month now.
The closure of the Strait of Hormuz – the narrow waterway that connects Gulf oil producers to global markets – has led Global energy production has stagnated and raise the prices of gasoline, diesel, fertilizer, plastic, and thousands of other products.
This has led many Americans to fear that their rising energy bills are just the beginning — and that the ongoing U.S.-Iran conflict could raise grocery prices as well.
And yet, that leg still hasn’t fallen off. According to March Consumer Price Index (CPI)Food prices were not higher last month than they were in February.
Additionally, on Friday, the United States and Iran reportedly reached an agreement open the narrow channel again for the duration of their fighting. A permanent peace agreement, however, has yet to be negotiated.
All of this begs the question: Are American grocery shoppers out of the woods? Will we be spared the increase in food prices due to war? And what would happen if Friday’s news turned out to be false – and the peace talks finally broke down?
To explore these questions, I spoke with Ken Foster this week, an agricultural economist at Purdue University. Our conversation has been edited for brevity and clarity.
The war with Iran has not yet brought any increase in food prices. What? Should that allay fears that Americans’ grocery bills are about to go up? Or is this just the calm before the storm?
Therefore, it takes time for the energy shock to work its way through the supply chain. Many of the oil and gas shipments that left the Strait of Hormuz at the start of the conflict recently arrived at their destination ports. And many food producers are working on contracts that depend on pre-war energy prices. For example, think of all the food products that are transported by diesel-powered trains or trucks. Most of the diesel is sold at the original price. So the impact of the rise in the cost of diesel can work in that supply segment for weeks.
Intermediaries in the supply chain – manufacturers, etc. – will also take some of that if they can, at least in the short term. They can’t suck forever, but they will try for a while. And then, sellers are reluctant to change their prices, due to competition.
Still, there may be early signs that energy shocks are creeping into supply chains. This week, the government gave new Producer Price Index (PPI) data.. The report divides the middle part of the food supply chain into four stages – the first being close to the farmer, the last being before the product goes to the retailer. And it showed that prices in Stage 1 were 6.2 percent higher in March than a year earlier – and 2.4 percent higher than in February. Although, I would be careful reading too much into those numbers, as the data was collected on March 10, so only 10 days into the conflict.
Is a big increase in food prices later this year already inevitable? Or it can be avoided if a get busy reopening the sub-section?
At this point, I would avoid using the word “substantial.” If we see a return to something close to normal shipping by sea, then we will probably avoid major changes in food prices.
But if the war continues beyond a certain point, the impact on food prices could increase, due to the cost of fertilizers. In North America, farmers generally bought fertilizer for the 2026 crop before the war began. So it has not been as big a factor here as in Asia. But if the war begins to enter the crop year of 2027, then the effect of fertilizers will come in with the compounds of food inflation.
If fertilizer is not likely to increase food prices in the near future, what can?
Well, energy prices affect manufacturing, transportation and infrastructure costs. And then there is the packaging side.
If you think about our food today, we have very good packaging, which reduces food waste. But it is very chemical-heavy. There is a lot of plastic, a lot of foam. They use a lot of energy. And that’s where we’re going to see pressure in the next three to 12 months, if the conflict continues.
So how quickly does the crisis need to end for Americans to avoid food inflation? Is there a turning point?
Eric, if I could answer questions like that, I would have retired a long time ago. What I can say is that the longer the conflict continues, the harder it is for distributors and processors to absorb this on their side and not pass it on fully to consumers.
What example do we have of this type of disruption? Obviously, disasters hit the agricultural economy from time to time – there are droughts and crop failures. But how different is this type of problem from those?
Crop issues are usually localized or focus on a few products. So, as they move through the supply chain, consumers can take a chance: If beef becomes more expensive, they might eat more chicken. In an energy shock, there is nowhere to hide. It permeates the entire food economy.
As an introduction, we had the Russian invasion of Ukraine, which put a burden on energy, but also fertilizers and crops. Fortunately, none of the countries in the Middle East currently involved in this conflict are major food exporters. And the energy shock of the current is already greater. So it’s not a perfect analogy.
Have you ever so writtenas far as we see the price of food increasing due to this, it can last for a long time. Why is that?
Risk prevention, in particular. Manufacturers and retailers don’t want to be the first to cut prices. And they don’t want to hold back and find themselves in a losing position.
Historically, we have seen that food prices are slow to rise in such situations, but slow to decrease on the other hand. Most of the time, the price doesn’t drop at all; they stop growing quickly. Therefore, if we see an increase in food inflation, consumers may feel the effects long after the shock is over.
