A new report from the Biden administration raises questions about the causes of rising food prices that have long weighed on American household budgets in the wake of the coronavirus recession.
Profits and inflation have soared simultaneously in the aftermath of the pandemic, sparking a heated debate among economists about how much profits, rather than rising costs, are actually driving up prices.
Post-pandemic supply shortages and massive economic stimulus initially allowed companies to raise prices for their products, but experts have been fighting over profit margins for years. It is now at an all-time high – This in itself causes inflation, keeping prices higher for longer than they should.
A report released last week by the Federal Trade Commission (FTC) cited expanding margins as a key driver of recent price increases, citing trends in the increasingly concentrated grocery sector.
“Some companies appear to be using rising costs as an opportunity to raise prices further to increase profits, and even as supply chain pressures ease, profits are still rising. “Large retailers and wholesalers with significant influence over their suppliers could have taken more aggressive action to protect themselves,” FTC researchers concluded.
Retail grocery revenues exceeded cost by more than 6% in 2021 and rose to more than 7% in 2023, “significantly higher” than the recent high of 5.6% in 2015. The FTC’s calculations control for fixed costs and labor costs.
“This profit trend casts doubt on the argument that grocery store price increases are simply tied to retailers’ own cost increases,” the agency said, urging policymakers to “further investigate.” urged.
The report comes as President Biden, in the run-up to the 2024 election, ramps up a crackdown on large companies responsible for high prices and “junk fees.”
Although consumer sentiment has improved in recent months, Mr. Biden still faces a major challenge in convincing voters about his handling of the economy after years of high inflation, with one survey showing that Americans’ approval ratings is only 37%. New Gallup Poll.
Economists say similar margin expansion has been seen in downstream industries over the past few years, leading to a new market equilibrium where output has adjusted. One notable example is the automotive sector.
“Automaker margins continued to outpace supplier profits in the third quarter,” Bain & Company consultants said in a November analysis, adding that supplier costs remained roughly flat, leading to lower downstream He said profit margins expanded as well.
“[Equipment manufacturers] We were able to survive the supply shortage. [in the chip sector] “They could focus production on the most profitable models and raise prices, but suppliers had no such strategic choice,” they said.
Perhaps the most comprehensive argument that margin expansion has shifted the course of the pandemic from an outcome of inflation to one of its own self-sustaining drivers comes from economists Isabella Weber and Evan Wasner of the University of Massachusetts Amherst. is.
They characterized the pandemic inflation as “seller’s inflation” resulting from the ability of firms with a lot of market power in concentrated industries to simply raise prices.
“This requires a tacit agreement that can be adjusted by sector-wide cost shocks and supply bottlenecks,” they write, with supply shocks acting as a cover for cartel-like price coordination among competitors. He argued that it was possible.
They argued that such a process could even lead to “a self-sustaining inflationary spiral under certain conditions,” although a definitive picture of such a spiral has yet to be determined.
Fed economists have made similar arguments to Mr. Weber and Mr. Wasner themselves, noting that while the markup increased 3.4% in 2021, PCE inflation was 5.8%, pointing out that the markup for that year was “inflation.” This suggests that it may account for more than half of the total.
“Given that markup growth contributed little to inflation in the decade leading up to the COVID-19 pandemic, this “The high markup growth is particularly surprising.”
While Fed researchers acknowledged the causal effect of profits on inflation, they concluded that higher markups were more likely related to expected cost increases rather than increased monopoly power.
But a new report on the grocery business released by the FTC presents a different picture, showing that downstream retail power is concentrating and pushing the entire supply chain to increase profit margins. It shows.
The report said the grocery sector has experienced “significant consolidation over time,” with the four largest companies accounting for more than 30% of sales in 2019, compared to half that 30 years ago. Pointed out.
It also accuses major grocery retailers of “implementing policies that impose strict delivery requirements on upstream suppliers and impose fines for non-compliance.” Walmart even tightened the shipping requirements its suppliers must meet to avoid fines as the pandemic drags on. ”
Author Adam Kurt, who worked as a supply chain manager in the aerospace industry and wrote two books based on his time working in various jobs at Whole Foods during the height of the pandemic, argues that these policies They criticized it as “ridiculous” and “bullshit.” Interview with The Hill.
“It’s not going to help anyone. It’s definitely going to increase the cost of goods as well. It’s going to affect the poor the most,” he said, adding that in his time at Whole Foods, such policies He added that he had not seen it.
Supply chain pressures have largely eased as production and logistics pipelines normalize, and inflation has fallen sharply over the past year and a half, with the core PCE price index falling to an annualized increase of 2.8%.
But profits remain well above accustomed levels, hitting a record $2.8 trillion in the fourth quarter, according to Commerce Department data released Thursday. Profit margins expanded for the second consecutive quarter, rising three points to 12.2% of GDP, according to calculations by financial firm EY Parthenon.
Some left-leaning economists support the FTC report, saying expanding profit margins raises important questions about competition.
“The interesting question is whether the supply chain is almost back to normal and profit margins are now falling. I don’t know if they are doing that, but it suggests a real problem of not enough competition. Dean Baker of the Center for Economic Policy Research told The Hill.
The FTC’s findings on driving price-setting through higher margins follow a 2022 United Nations report that found that inflation was the result of increased costs “amplified by price-setting firms in highly concentrated markets raising price margins.” This is also reflected in the book.
Future research will shed more light on the interplay between post-pandemic profit margins and private sector market power, but the FTC warns that the economic effects of increased profits for grocery stores are still lingering. There is.
“While some of these symptoms may subside as supply chains normalize, the underlying problems remain,” the agency said, noting that profit margins remain “significantly elevated.” .
Updated at 11:49 p.m. EDT.
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