Paul Stivers, 10/8/2024
Food price inflation is due primarily to money giveaways by the federal government, and US policies that discourage the exploration of petroleum products in the US.
1. In 2021 the American Rescue Plan Act, signed into law by President Biden, included a giveaway of over $600 billion 1 to lower income US residents at a time when unemployment was back down near its pre-covid levels 2. This caused an increase in demand for goods. Supply on the other hand stayed level to down. This is because people especially in lower income jobs tended not to go back to work while they still had money in their pockets. So demand for goods went up. Demand for employment was high. Supply of goods was level to down. Supply of workers stayed down. By the basic law of supply and demand, wages went up and prices for goods went up. These price increases are mostly sticky. Once wages go up they don't come back down.
2. Demand for petroleum has outpaced US production, causing an increase in petroleum prices. Energy prices affect the price of all goods. It takes energy to both produce and transport the goods.
The great lie that is used to cover up the real causes is that food price inflation is due to price gouging by food producers and grocery stores. This is not true.
Let me start by define a few business metrics.
Revenue = money brought in from sales.
Profit margin = 100 x (revenue - operating costs)/revenue, expressed as a percent.
Profit, AKA gross profit, AKA total profit = accumulated profit over some period of time.
The only metric necessary to detect price gouging is profit margin. Not profit, but profit margin.
Profit margins have not changed more than +/- 2% from 2020 to 2024, which is a small fraction of the 20+% increase in food prices. They run approximately 3% for grocery stores and 6% for food producers. Beverages run a little higher depending on the beverage 3.
The lie in articles about price gouging is typically told by telling a truth with the intention that most readers will misunderstand what it means. The truth being that profits (not profit margin) have risen significantly since 2020 for some grocery chains. If the articles wanted to honestly explore price gouging then they would focus on profit margin, not profit. But then there would be no story. Let me explain...
Ironically, the way that these chains increase profits is that they continue to cut operating costs relative to their competitors and thereby offer more competitive prices to their consumers. These chains gain more market share over time by gaining more customers and sometimes by buying out less competitive companies.
Let's look at an example with numbers.
In 2020, store xyz has $100 million in revenue from sales. If profit margin is 3% then the store makes $3 million in profit (3% of $100 million).
If in 2023 the store has increased its revenue from sales to $150 million, presumably because more customers prefer to shop with them, then the profit for 2023 is $4.5 million, a 50% increase in profit over 2020. However, their 3% profit per unit sales has not changed. They are not gouging the customer. They are still profiting by a thin 3% of what they sell.
Articles similarly often quote CEOs of grocery chains talking about pricing power. That only means that they have the power to raise prices as costs go up to maintain their profit margin, because people have to eat. If they raise prices above the competitive 2-4% profit margin though, other companies will steal their market share. So this pricing power is limited to the ability to cover costs.
Again, any article that wants to honestly investigate price gouging need only investigate movement in profit margin. The rest is smoke and mirrors.
References:
1. ChatGPT: How much money was given to individuals via stimulus checks plus extended unemployment benefits from the ARPA of 2021?
2. US Unemployment Rate Chart click on 10Y
3. Google: How much have profit margins changed for grocery stores and food producers since 2020?
Should generate an AI overview.