On Tuesday, August 13, I was watching and working as soon-to-become Hurricane Ernesto approached Puerto Rico. Early that morning I wrote to some colleagues, “DACO has announced a price freeze starting tonight (both my Adam Smith and Network Science predilections are always offended at this).” Puerto Rico’s Office of Consumer Affairs is not alone in such efforts. There are similar laws on the books of many states. The price gouging red flag is often waved just before and soon after natural disasters.
On Friday, August 16 at a campaign event in Raleigh, North Carolina, Vice President Harris said:
When I am elected president, I will make it a top priority to bring down costs and increase economic security for all Americans. As president, I will take on the high costs that matter most to most Americans, like the cost of food. We all know that prices went up during the pandemic when the supply chains shut down and failed, but our supply chains have now improved and prices are still too high. A loaf of bread costs 50 percent more today than it did before the pandemic. Ground beef is up almost 50 percent. Many of the big food companies are seeing their highest profits in two decades. And while many grocery chains pass along these savings, others still aren’t. Look, I know most businesses are creating jobs, contributing to our economy, and playing by the rules, but some are not, and that’s just not right, and we need to take action when that is the case. As attorney general in California, I went after companies that illegally increased prices, including wholesalers that inflated the price of prescription medication and companies that conspired with competitors to keep prices of electronics high. I won more than $1 billion for consumers. So, believe me, as president, I will go after the bad actors. And I will work to pass the first-ever federal ban on price gouging on food. My plan will include new penalties for opportunistic companies that exploit crises and break the rules, and we will support smaller food businesses that are trying to play by the rules and get ahead. We will help the food industry become more competitive, because I believe competition is the lifeblood of our economy. More competition means lower prices for you and your families.
Back in March the Federal Trade Commission released a staff report entitled, Feeding America in a Time of Crisis. At the time the FTC Chair explained, “As the pandemic illustrated, a major shock to the supply chain can have cascading effects on consumers, including the prices they pay for groceries. The FTC’s report examining U.S. grocery supply chains finds that dominant firms used this moment to come out ahead at the expense of their competitors and the communities they serve.” Please read the report, it is worth your time. It is clear that the Vice President’s campaign advisors at least scanned the report. I wonder if they talked with her economic advisors before giving price-gouging such a prominent place in the new presidential candidate’s first policy speech.
Tuesday morning — just four days on — one of those economic advisors was on Bloomberg Surveillance. Please see the video clip below. It is my sense that the campaign now recognizes this economic gesture (much less than a policy) was a confusing signal. Economists and others have been sent out to clarify the Vice President’s intention. The intention was to express empathy with making ends-meet, promise reduced food inflation, and place the blame on some grocery players. That third intention has back-fired, as blame-games often do. (More and more and more.)
Coming out ahead of competitors does motivate most US grocery operators. Profit margins are a key measure of business — and supply chain — effectiveness. The transition from pandemic to post-pandemic demand and supply has been complicated. For example, please consider the Federal Reserve chart below. The blue line reflects total Personal Consumption Expenditures on Food-At-Home. This includes inflation — and confirms why the Vice President and former President are each keen to express empathy and give practical attention to keeping food inflation at its now placid pace. The red line is “real” PCE for groceries, in other words adjusted for inflation.
In June 2024 US consumers expended about 12 percent more real dollars on groceries than in June 2018 and about 8 percent more than June 2019. This is a huge increase over such a short time. Even larger pandemic period increases — for example, June 2021 was 14 percent above June 2018 — could be explained by still tight constraints on the Food-Away-From-Home sector and other retail limitations. During the pandemic Food-at-Home was clearly “comfort food” not just calories. With restaurants and more now fully open for at least two years, why we continue to spend so much more on groceries than pre-pandemic is a mystery to me.
This significant — and strangely sustained — increase in demand has contributed to increased food prices. During the height of the pandemic costly changes were made across the entire grocery supply chain to fulfill very different — and volatile — demand patterns. As we began to move out of the pandemic everyone I know and follow in the grocery sector anticipated overall demand would return to something close to pre-pandemic patterns. But demand has stayed much higher.
No healthy, efficient firm keeps much more than five percent excess capacity on-hand — most CFOs would rather see three percent. The capital and labor costs to fulfill an additional eight or ten or twelve percent more consumption are significant. A prudent firm does not make that investment to fulfill a blip. One of many components of higher food prices since 2022 is upstream supply probing the elasticity of downstream demand. “Do you really want this?” “Will you still want this after we spend millions to deliver much more of this?” “How much do you want?” “What is your upper limit?” “What is our likely floor?”
Since the second half of 2021 these probes have confirmed a ceiling. Since the beginning of this year, we seem to have found the floor. Along the way upstream capacity has been added. Instead of probes for demand (and price) elasticity we are are now seeing price and variety competition. Accordingly, recent Consumer Price Index increases have softened. According to the USDA, channeling the Bureau of Labor Statistics, “The [June] food-at-home (grocery store or supermarket food purchases) CPI was unchanged from May 2024 to June 2024 and was 1.1 percent higher than June 2023.”
Reality can be tough to discern, especially in times of rapid change. Price volatility is insidious and destructive. But price is perhaps our best signal of the match or mismatch of supply with demand. Market economies use pricing trial and error over time to calibrate. It is often messy. There is absolutely a government role in preserving price competition, and this is tough and treacherous enough. But prices per se should be allowed to sing their arias or requiems. This is our best bet for hearing reality. To paraphrase and adapt Churchill, “The free market is the worst economic system except all those other systems that have been tried.”
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August 22 Update: The New York Times reports on the ambiguity — perhaps, ambivalence — of the price-gouging proposal. This morning on Bloomberg a pollster was interviewed who explained that attention to price-gouging and holding “bad actors” accountable polls very well with potential voters. It will be several hours before I can get that video or transcript. This pollster is not the only one saying so. At the Atlantic Josh Barro writes, “The vice president’s campaign promises make no sense to people acquainted with supply and demand—but they might win elections.”
August 23 Update: Price-gouging was not referenced in Ms. Harris’ acceptance speech, but according to the Wall Street Journal the issue is very much alive — and motivating — for many of those attending the Democratic National Convention.
August 28 Update: Robert Armstrong at the Financial Times has given two columns to this issue. On Tuesday he delivered a set of charts and related data to support this provisional conclusion, “The biggest retailers and suppliers in the grocery value chain took a lot of price increases after the pandemic. In some cases this led to expanding margins, but even in the cases where margins were roughly flat, profits often rose at a rate faster than the pre-pandemic trend and faster than the rate of general inflation.” This morning he gives us more data and a different angle of analysis on the full data collection and then concludes, “The primary driver of high profits… was not higher profit margins, but higher revenues at similar margins. In that sense, it is true that… food companies only “passed along” input cost increases.” (Ellipses extract reference to the example of one Consumer Packaged Goods company.)
Mr. Armstrong does not deal with the substantial and sustained increase in real — inflation adjusted — demand for groceries that I see reflected in the chart above. In responding to this PCE based analysis one of my readers wonders if what I present as consumers buying more volume might be the “statistical shadow of food inflation that is higher than average inflation.” That is a question absolutely worth asking. I have sent an email to the Bureau of Economic Analysis asking for their answer. Until then, in the BEA statistical notes I read, “Quantity and price indexes are calculated using a Fisher chained weighted formula that incorporates weights from two adjacent periods (months for monthly data, quarters for quarterly data and annuals for annual data)… Chained-dollar values are not additive because the relative weights for a given period differ from those of the reference year.” But I will confess that this is one of those instances where I seem to “hear” an answer but the tune changes as my ears are more or less able to muffle ambient sounds (signals or noise?).