The FTC calls out profits as a driver of food prices

A new report from the Biden administration is raising questions about the cause of rising food prices, which have squeezed American families for years after the COVID-19 recession.

Profits and inflation rose together in the wake of the pandemic, fueling intense debate among economists about the extent to which profits, as opposed to cost increases, were actually driving up prices.

While a supply crunch and a massive post-pandemic injection of stimulus initially allowed companies to charge more for their products, experts have wrestled for years over whether margins — now at a record high — have themselves become the cause of inflation. , keeping prices higher for longer than they otherwise would have to be.

The report released last week by the Federal Trade Commission (FTC) points to margin expansion as a key driver of recent price increases, citing dynamics in the increasingly concentrated grocery sector.

“Some firms appear to have used the rising costs as an opportunity to raise prices further to boost their profits, and profits remain high even as supply chain pressures ease. Larger retailers and wholesalers with significant influence over their suppliers were able to take more aggressive action to protect themselves,” the FTC researchers concluded.

Grocery retail revenues rose to more than 6 percent above costs in 2021 and more than 7 percent in 2023, “substantially higher” than their recent high of 5.6 percent in 2015. FTC Accounting Controls for Fixed and Labor Costs.

“This profit trend casts doubt on claims that rising grocery store prices are simply keeping pace with retailers’ own rising costs,” the agency said, calling for “further investigation” by policymakers.

The report comes as President Biden ramps up his efforts to crack down on big businesses responsible for high prices and “junk tariffs” ahead of the 2024 election.

While consumer sentiment has rebounded in recent months, Biden still faces significant challenges convincing voters of his handling of the economy after years of high inflation, with only 37 percent of Americans approving, according to a new poll by Gallup.

Economists have observed similar margin expansion dynamics in downstream industries over recent years resulting in new market equilibria with adjusted output levels. A notable example has been in the automotive sector.

“Automakers’ profit margins continued to outpace their suppliers in the third quarter,” consultants Bain and Company wrote in a November analysis, describing the same downstream margin expansion as supplier costs were largely contained. stable.

“[Equipment manufacturers] were able to eliminate the supply shortage [in the chip sector] focusing production on higher-margin models and raising prices, but suppliers had no such strategic options,” they said.

Perhaps the most comprehensive argument that margin expansion turned over the course of the pandemic from a result of inflation to one of its self-sustaining drivers has come from University of Massachusetts Amherst economists Isabella Weber and Evan Wasner.

They characterized pandemic inflation as “sellers’ inflation” arising from the ability of firms with a lot of market power in concentrated industries to simply raise their prices.

“This requires an implicit agreement which can be coordinated by sector-wide cost shocks and supply bottlenecks,” they wrote, arguing that supply shocks can act as a cover for cartel-like price coordination among competitors. .

Such a process could even lead to “self-sustaining inflationary spirals under certain conditions,” they argued, although a definitive picture of such a spiral has yet to emerge.

Federal Reserve economists have made similar arguments to Weber and Wasner themselves, noting that values ​​rose 3.4 percent through 2021, while PCE inflation was 5.8 percent, implying that markups could “comprise more than half of inflation” during that year.

“Such high markup growth is particularly striking given that markup growth contributed almost nothing to inflation in the decade leading up to the COVID-19 pandemic,” Kansas City Fed researchers wrote in a theory-heavy paper.

While Fed researchers acknowledged the causal effect of profits on inflation, they concluded that increases in growth were more related to anticipated cost increases than to an increase in monopoly power.

But the new report on the grocery business from the FTC offers a different picture, one that showcases the concentrated power of downstream retailing flexing its muscles over supply chains to boost margins.

The report notes that the grocery sector has undergone “significant consolidation over time,” with the four largest companies accounting for more than 30 percent of sales in 2019, compared to half of that 30 years ago.

In addition, it calls out major grocers for implementing “policies that imposed strict distribution requirements on their upstream suppliers and threatened fines for non-compliance. Walmart even tightened the delivery requirements its suppliers had to meet to avoid fines as the pandemic continued.

Author Adam Kaat, who works as a supply chain manager in the aerospace industry and wrote two books based on his time working various jobs at a Whole Foods during the height of the pandemic, criticized the policies as “absurd.” and “desperation” in an interview with The Hill.

“This is not going to help anyone. This will also increase the cost of the items, definitely. It’s going to affect poor people the most,” he said, adding that he didn’t see any such policies during his time at Whole Foods.

Supply chain pressures have largely dissipated as production and logistics pipelines have normalized, and inflation has also fallen sharply over the past year and a half, with the core PCE price index falling to a 2.8 percent annual increase.

However, earnings are still well above their accustomed levels, hitting an all-time high of $2.8 trillion in the fourth quarter, according to Commerce Department data released Thursday. Profit margins widened for the second quarter in a row, by 3 percentage points to 12.2 percent of GDP, according to an estimate by financial firm EY-Parthenon.

Some left-leaning economists are backing the FTC’s report, saying the expanded margins raise an important question about competition.

“The interesting question is whether margins are coming down now, with the supply chain almost back to normal. I’m not sure they have, and that would suggest a real issue of inadequate competition,” Dean Baker of the Center for Economic Policy Research told The Hill.

The FTC’s findings of inflated margin prices are echoed in a 2022 United Nations report that found inflation was the result of cost increases “enhanced by price-setting firms in highly concentrated markets that increase their brands”.

While further research will reveal more about the interplay between profit margins and private sector market power in the wake of the pandemic, the FTC is warning that the effects of increased profits at grocery stores still have an economic effect.

“As supply chains normalize, some of these symptoms may diminish, but underlying issues remain,” the agency said, noting that margins are still “quite elevated.”

Updated at 11:49 PM EDT.

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