When inflation eats away at demand

Aslak Berge

“Inflation” has become one of the most frequently used words of the year. And it will be felt both on the plate and in the wallet.

A friend of mine runs a pub. A watering hole in a popular nightlife street. He recently stated that activity has picked up in recent months, and is now almost as high as before the pandemic.

“But people can’t afford it. Interest rates are rising, the electricity bill is getting bigger – everything is getting more expensive,” he said.

The situation is not that different from other cities and countries.

In the UK, the pub chain Young’s, which operates 200 pubs around the archipelago, has been forced to remove salmon from the menu. Inflation is the highest in 40 years, and CEO Patrick Dardis wants to “keep margins” by exchanging salmon for trout.

Aslak Berge

Purchasing power is under pressure.

It is also noticeable in Swedish grocery stores.

“Before we could have fresh salmon for 99 kroner (€9.66) a kilo, now it can cost up to 300 kroner (€29.3) a kilo. There are not many who want to buy salmon fillet at beef fillet price,” Lindah Ryman, fish manager at City Gross Nyköping, told the newspaper Fri Köpenskap .

Salmon are also being replaced there with cheaper alternatives, such as cod and redfish.

In the same way, the substitutes are increased in price. Everything is getting more expensive.

You have to change food
You can always look around for cheaper alternatives. The total budget for the shopping cart does not change even though most items have become more expensive. Some of the items will be deselected.

This is what is called “demand destruction”, which occurs after a sharp rise in prices, and will gradually balance supply and demand at a lower price cross. The customer gets less money to spend. And look around for something else – or stop buying the goods.

For a market such as salmon, which has seen an explosive price increase in 2022, the volume market is shrinking. Segments with low or reduced purchasing power disappear. The premium segment, those with the thickest wallets and both the will and ability to buy, remains.

Then it can be stated that the lean supply side in any case indicates that there will be less fish available in the market. It’s not enough for everyone. And then the price has to go up.

The catch is that the new and record high price level has not reached the end customers. Not yet.

The smokehouses and processing companies mostly buy the salmon at a spot price, and resell on fixed and currently discounted long-term contracts to the supermarket chains. This means that the middleman, the processing company or the wholesaler, gets into a pinch, while the supermarket chains continue to push salmon whose sales price does not reflect the underlying spot price.

This development lasts until the contract expires and will be renegotiated with the intermediary. Only then does the new and significantly higher price level strike – and the end customer notices it on the checkout label. In the next round, the end customer cuts their purchases of salmon, and demand falls. Then the spot price also comes under pressure.

After the sweet itch comes the sour sting.

The fresh food counter at the French hypermarket chain Leclerc. Photo: Aslak Berge

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