After years of stubbornly high inflation, homes remain expensive and out of reach for many millennials. Those consumers have responded by saving less, spending more and shopping for more affordable foods to make up the difference. According to David Magaña, a senior analyst at RaboResearch Food and Agribusiness, this is raising prices at the grocery store, but not benefiting California growers.
Presenting to the State Board of Food and Agriculture at its monthly meeting on Tuesday, Magaña explained how macroeconomic trends are driving consumer behaviors into unprecedented territory.
David Magaña, Rabobank“We’ve all been feeling the impacts of persistent, elevated inflation over the past three years,” said Magaña, who cautioned that a similar degree of inflation 40 years ago would have driven interest rates four times higher than the current levels.
He pointed out that rates would only return to near-zero under a black swan or gray rhino events—think 9/11, the 2008 financial crisis or Brexit as swans and geopolitics, monetary policies and new technologies as the predictable but often ignored rhinos. Macroeconomists instead expect inflation to remain above 3% and unemployment below 5%, creating little incentive for the Federal Reserve to aggressively cut interest rates in the coming months, he said.
Wage growth, meanwhile, is once again moving in a positive direction and consumers are spending more of those paychecks on travel and entertainment, driving a YOLO economy, as Magaña dubbed it. The “you only live once” mindset blossomed amid the pandemic and has found new meaning as spending shifts from goods to experiences.
The root of the problem lies with the most unaffordable housing market in U.S. history, pricing millennials out of the market as they start families. Yet the trend has accelerated past expectations. Younger consumers are spending 20% more year-over-year, leading to more credit card debt and delinquencies.
“If I'm not going to be able to afford a house, why do I save money?” said Magaña, channeling the average Millennial mindset. “I'd rather spend it now.”
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Millennials are adapting to long-term inflation by shifting their shopping to more affordable places, choosing cheaper products or cutting out certain spending. That has led to marketing implications for grocery store sales, explained Magaña, noting that consumers are searching for value. In-store transactions for discount grocers, for example, spiked in 2022 and have maintained a consistent 10% year-over-year increase since.
The demand has driven up prices for the most affordable foods, growing 10 percentage points faster than the more expensive options, a phenomenon Magaña called cheapflation.
“Everything is getting more expensive, but the most affordable foods are increasing the fastest,” he explained.
The fresh produce aisle, however, has bucked the trend. Prices for fruits, vegetables and tree nuts have fallen in recent years, disproportionately affecting growers. While prices for potatoes have dropped about 10%, for instance, those growers are getting just half the price they did a year ago. Almonds and walnuts have hit historic lows as well.
Magaña said this has left farmers frustrated that retailers are not fostering more demand for their products.
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