{"id":32697,"date":"2024-10-02T14:12:28","date_gmt":"2024-10-02T18:12:28","guid":{"rendered":"https:\/\/poole.ncsu.edu\/thought-leadership\/?p=32697"},"modified":"2024-12-30T10:05:35","modified_gmt":"2024-12-30T15:05:35","slug":"are-food-retailers-price-gouging","status":"publish","type":"post","link":"https:\/\/poole.ncsu.edu\/thought-leadership\/article\/are-food-retailers-price-gouging\/","title":{"rendered":"Are Food Retailers Price Gouging?"},"content":{"rendered":"\n\n\n\n\n

For the last two or three years, consumers in the United States have felt the pinch of inflation. At the gas pump, the grocery story, and pretty much everywhere that people buy, prices have risen.<\/p>\n\n\n\n

That\u2019s led to a lot of speculation about what\u2019s causing that inflation, and corporate price gouging is one potential cause that\u2019s gotten attention from, among others, Democratic presidential nominee and Vice President Kamala Harris<\/a>.<\/p>\n\n\n\n

Inflation is complex, and it\u2019s the result of a web of inputs. You can never point to one policy or act or person as the cause <\/em>of inflation. But since price gouging has been the subject of so much speculation, let\u2019s dig into it.<\/p>\n\n\n\n

Two years ago, I wrote a series of blog posts<\/a> with Jason Miller<\/a>, associate professor of supply chain management at Michigan State University, about whether food companies and grocery stores have excessively raised prices as inflation has increased. He recently updated that research in a series of LinkedIn posts, and I\u2019ll draw from that work to answer some key questions about what\u2019s caused the rise in food prices.<\/p>\n\n\n\n

Food prices have definitely made a significant jump in the last two years. In 2022 and 2023, American households spent 11.2 percent of their income on food, according to the U.S. Department of Agriculture. That\u2019s the highest share since the early 1990s. <\/p>\n\n\n\n

To assess whether food price gouging is occurring (and whether it\u2019s driving inflation), you have to answer two questions: Are the costs of making, transporting, and selling food rising as fast as the cost to consumers? And are companies in the food industry making a bigger profit?<\/p>\n\n\n\n

Comparing Food Industry Input and Output Costs<\/strong><\/h3>\n\n\n\n

The chart below plots the change in input prices for food and beverage stores, excluding labor and capital, and compares them to the prices paid by consumers. Input price data is from the Bureau of Labor Statistics\u2019 Producer Price Indexes<\/a>, and the consumer price data comes from the Bureau of Economic Analysis\u2019 Implicit Price Deflator for Food & Beverage Stores<\/a>.<\/p>\n\n\n\n

<\/p>\n\n\n\n

Note that, for the first half of 2024, there\u2019s a near-perfect 1:1 relationship between the two series, indicating that output prices have risen at the same pace of input prices. This is entirely consistent with cost pass-through, not price gouging.<\/strong><\/p>\n\n\n\n

In other words, this data suggests that food and beverage stores are passing their own rising costs on to consumers\u2014not raising prices excessively.<\/p>\n\n\n\n

But what about profits?<\/strong><\/h3>\n\n\n\n

So are grocery retailers and food producers \u2018 margins increasing as food prices have gone up?<\/p>\n\n\n\n

To answer that question, we\u2019ll look at the Census Bureau\u2019s Annual Retail Trade Survey<\/a> (ARTS), which shows how much profit a retailer makes per unit sold. The two tables below show the gross margin rates for warehouse clubs and superstores (like Walmart or Costco) and grocery stores, respectively:<\/p>\n\n\n\n

<\/p>\n\n\n\n

<\/span>That half-point increase for grocery stories isn\u2019t clear-cut evidence that they\u2019re profiting excessively in this moment of inflation. To show why, let\u2019s think through how a grocer makes a 27-percent margin on a package of chicken breast. If the grocer paid $10 for the package in pre-inflationary 2019, they\u2019d need to charge $13.70 to make a 27% margin on it.<\/p>\n\n\n\n

In 2022, inflation raises the grocer\u2019s cost for those chicken breasts to $12.50. To cover that cost increase and maintain a 27-percent margin, the grocer would have to raise the price by $4.62. So while the grocer\u2019s net margin ($4.62) appears to have increased, the net margin is still the same: 27 percent. Retailers don\u2019t always pass their costs on to consumers on a 1:1 basis.<\/p>\n\n\n\n

Taken together, these data do not support the suggestion that grocery retailers and food producers are engaging in price gouging.<\/strong> Although consumers certainly have suffered as a result of price increases, the normal effects of supply and demand, input commodity prices, and supply chain shortages are the real culprit. And the federal government can\u2019t do much about those factors.<\/p>\n\n\n\n

Editor\u2019s note: This story was adapted from a longer piece by Handfield<\/a>, who is the Bank of America University Distinguished Professor of Supply Chain Management and executive director of the Supply Chain Resource Cooperative. <\/em>Read the original full article<\/em><\/a>.<\/em><\/p>\n\n\n