Don’t blame ‘greedflation’ for high food prices in America

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Vice-President Kamala Harris’ recent proposal to ban price gouging in the US grocery industry has raised tricky questions about the recent history of grocery prices, inflation and market power.

Markups in grocery stores appear to be persistently higher than before the pandemic. But don’t rush to the conclusion that market power is the only explanation.

Grocery prices rose 23.5% between the end of 2019 and the start of 2024, compared with an increase of 18% for all other prices. The mere fact that grocery inflation outpaced everything else is not, by itself, evidence of unscrupulous pricing behaviour. If it were, then by definition half of inflation every month would always be the result of price gouging!

Economists who think about pricing power focus not on the overall price, but on profit margins and markups. The most comprehensive data on grocery industry revenues and costs come from the Census Bureau’s Quarterly Financial Reports (QFR), which aggregates financial data on large public and private companies alike.

The QFR shows that grocery markups rose over the pandemic, stayed tenaciously elevated, and their behaviour has been in stark contrast to the rest of retail.

The average grocery markup rose from 5.3% of cash operating costs in 2019 to 6.8% in the second quarter of 2022. Non-grocery retail behaved very differently. Their markups spiked more quickly in the wake of the pandemic, but then fell back to pre-pandemic levels and even slightly below.

This raises the most relevant question of all, which is how much pandemic-era inflation was driven by unusual markups. Looked at in isolation, not much.

Imagine if consumer grocery spending stayed the same but grocery stores kept markups at 2019 levels. That would have meant cumulative grocery inflation of roughly 22% rather than 23.5%, explaining less than a tenth of actual grocery inflation.

But grocery inflation didn’t happen in isolation. Much of the food and beverage price increases since 2019 reflect general price pressures. A different question, then, is how much markups account for higher grocery prices relative to overall prices.

Grocery prices grew about 5.5% faster than all other prices since 2019. Had markups stayed at their 2019 level, grocery prices would have grown 4% faster. So, markups explain about a quarter of relative grocery inflation from before the pandemic, a more substantial chunk but still far from all of it.

Moreover, beneath these industry-wide averages lies a great deal of variation in markups between different firms. [The average markups for] a couple [of public grocers] are still meaningfully above pre-pandemic levels, but many others are back to being at or very close to their 2019 levels.

Conventional economics would suggest they are the result of a collision between a surge in demand and constrained supply. The pandemic certainly saw both, as real food and beverage retail spending per person shot up 8% in the first quarter of 2020 as restaurants closed and anxious households stocked up, and remained around that level for two years.

The pandemic also saw a variety of supply chain snarls. Recent work by University of Massachusetts-Amherst economics professor Isabella Weber and others has suggested a microeconomic variation that carves out more of a role for market power, where grocery stores with market power use supply constraints to coordinate industry-wide price increases.

The problem here is that these explanations do less well to explain both the tenacity of average markups into 2024—after the pandemic subsided, supply chains opened up and real grocery spending declined—as well as the normalization of large markups by individual grocers.

This suggests other factors may be at play. For one, the markups could reflect shifts in consumer behaviour rather than corporate behaviour. A prime suspect is the rising popularity of private label (store) brands.

Private-label products tend to be lower in price and so are attractive to consumers, especially during periods of high inflation. But they are also higher-margin products. That means higher average industry margins could partly reflect a greater share of consumer spending on higher-margin store brands.

Another culprit could be grocery delivery services, which became more popular during the pandemic and remain so. Stores often charge a higher markup for the same product when it’s delivered versus bought in-store. Hence, the rise in average markups could also in part reflect greater purchases of convenient, delivered groceries.

The pandemic was a once-in-a-century shock that upended a lot of conventional wisdom. As the debate over grocery prices shows, we’re still sifting through even the basic facts of what happened, let alone the lessons to draw. ©bloomberg

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Don’t blame ‘greedflation’ for high food prices in America

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