How Food Inflation Will End Up Being A Boon For Grocers

Higher food prices in the U.S. should eventually translate into higher prices for grocery stocks, according to JPMorgan’s Charles Grom.

The process works like this: commodities prices rise, and are passed on to producers, who then pass them on to consumers, which then sees same store sales rise for grocers, and markets react sending share prices higher.

A little more on the first bit. Step one requires commodities prices to rise in line with PPI.

From JPMorgan’s Charles Grom:

As reflected in the chart below, since 1990 the J.P. Morgan Agricultural price index has demonstrated 68.9% positive correlation with the PPI Finished/Processed Foods Index – which tells us that an increase in overall commodity prices tracks fairly closely with higher wholesale inflation.


Photo: JPMorgan

So, as commodity prices continue to remain high and rise, finished products will too. There’s a lag, according to Grom, that could last 5 months. But eventually prices rise, and same store sales with them, the end result being a rise in stock prices for grocers.

From JPMorgan’s Charles Grom:

Given that investors have a propensity to look at supermarket ID sales as a gauge for the overall health of the business, it comes as no surprise that ID sales and supermarket stock price returns have demonstrated respectable 40.8% positive since 2003.

Grom’s top picks: Whole Foods and Kroger.

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