Why is breakfast so expensive?

This blog post first appeared in the C-FARE newsletter for March 2025.

Grocery prices are back in the headlines.  Food inflation spiked more than two years ago and was below its pre-pandemic trend for about a year, but rose again in late 2024 as shown below.

Figure 1. US inflation over the previous 12 months (January 1, 1990 – February 1, 2025)

Source: U.S. Bureau of Labor Statistics, via Federal Reserve Economic Data (FRED). Chart with updated data is at https://fred.stlouisfed.org/graph/?g=1Ewgx  

Figure 1 shows how retail grocery prices for food at home fluctuate more than the overall average for all goods and services, and even compared to restaurant meals or other food away from home. Large price swings triggered by COVID led to food price increases peaking in August 2022 at almost 14% higher than the previous August, before settling down to around 1% higher than the previous year each month for most of 2024, and then rising again in late 2024 and early 2025 as shown above.

News stories often focus on the price of eggs. Their national average price spiked to $5.90/dozen at the start of February 2025 after a previous peak of $4.80 in January 2024. Both of these spikes were caused by outbreaks of the H5N1 bird flu, which producers have been dealing with since January of 2022.  H5N1 bird flu, or avian influenza, causes large price spikes because the U.S. responds to it by paying farmers to destroy entire flocks, instead of vaccinating birds against the disease. It then takes several months for that farmer to restore production. Moreover, egg consumption usually calls for fixed quantities each day, so those cutbacks in supply lead to the price spikes shown below.

Figure 2. Consumer price indexes for eggs in context (January 1, 1970 – February 1, 2025)

Source: U.S. Bureau of Labor Statistics, via Federal Reserve Economic Data (FRED). Chart with updated data is at https://fred.stlouisfed.org/graph/?g=1Ew97  

Figure 2 shows how egg prices fluctuated without rising during the 1980s and 1990s, making them increasingly inexpensive compared to the broader category with meats, poultry, fish, or the average of all foods and beverages.  Egg prices then rose faster than prices of other foods in the 2000s, before falling back in 2016 and then rising again before bird flu hit in 2022 as shown above.

A contrasting example of grocery price dynamics involves processing and packaging, as illustrated by prices charged to restaurants and grocery outlets for precut frozen potatoes.  About 40% of all potatoes sold in the U.S. are processed in that way, almost all by just four companies (Lamb Weston, McCain Foods, J.R. Simplot and Cavendish Farms), and their pricing differs greatly from the cost of raw potatoes or other frozen fruits and vegetables as shown below.

Figure 3. Producer price indexes for frozen and raw potatoes (Jan. 1, 2019 – Feb. 1, 2025)

Source: U.S. Bureau of Labor Statistics, via Federal Reserve Economic Data (FRED). Chart with updated data is at https://fred.stlouisfed.org/graph/?g=1Ewde   

Figure 3 shows how raw potato prices fluctuate with the size of each harvest, leading to low prices in 2019, 2021 and 2024, punctuated by high-price years in 2020 and again in 2022-23.  In contrast, frozen potato prices barely changed from 2019 through early 2022, and then rose in stepwise fashion to a higher plateau since September 2023.

The very different price dynamics of groceries versus other products (Figure 1), eggs versus other animal source foods (Figure 2), and processed versus raw potatoes (Figure 3) give us important clues about how food markets work. For most foods, relatively inelastic demand means that supply fluctuations drive price changes.  In the case of eggs, responding to avian flu by culling flocks instead of vaccinating chickens causes extreme but brief spikes.  For potatoes, prices of precut frozen products could be driven by processing and marketing costs, but lawsuits filed against the four processing companies allege that since 2021 they have shared price data, allowing them to synchronize modest but steady price increases through 2022-23 and avoid reducing their prices in 2024 when the cost of raw potatoes dropped sharply . In summary, by examining historical price data, we can see beyond the headlines and detect the underlying drivers and policy choices affecting our grocery bills. Below each chart are links to updated data from the Federal Reserve Economic Data (FRED) system, an invaluable resource for tracking price changes in the coming months.