Blaming greedflation for high food prices is misguided

Vice President Kamala Harris’ recent proposal to ban price gouging in the 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 here.

Let’s start with the basics. 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 behavior. If it were, then by definition half 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 latter being the amount a retailer adds to the selling price above its costs. (1)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.(2)

The QFR shows that grocery markups rose over the pandemic, that they have stayed tenaciously elevated, and that their behavior has been in stark contrast to the rest of retail (see figure below). The average grocery markup rose from 5.3% of cash operating costs in 2019 to 6.8% in the second quarter of 2022 and has remained elevated. 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.(3)

But grocery inflation didn’t happen in isolation. Much of the food and beverage price increases since 2019 reflect general price pressures across the entire economy. 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 industrywide averages lies a great deal of variation in markups between different firms. The figure below compares average markups for some of the largest public grocers between 2019 and now, as well as Walmart and Costco. A couple are still meaningfully above pre-pandemic markup levels, but many others are back to being at or very close to their 2019 levels.

What might explain the markup behavior? Conventional economics would suggest they are the result of the 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 before beginning to decline in 2022. The pandemic also saw a variety of supply chain snarls and constraints (including some, like avian bird flu, not directly related to the pandemic). Recent work by University of Massachusetts-Amherst economics professor Isabella Weber and others has suggested a microeconomic variation to this story that carves out more of a role for market power, where grocery stores with market power use supply constraints to coordinate industrywide price increases.

The problem here is that these explanations do less well explaining both the tenaciousness 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 economists to consider. For one, the markups could reflect shifts in consumer behavior rather than corporate behavior. A prime suspect here 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 today. 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.

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(1) The concept of the average markup I use is (Net Sales — Cash Operating Costs)/(Cash Operating Costs), where Cash Operating Costs are COGS SG&A. This is closely related to an EBITDA margin.

(2) The QFR is limited to companies with more than $50 million in assets. These firms accounted for 58% of food & beverage retail sales in 2023.

(3) In reality, aggregate grocery demand and by extension cost of goods sold would have likely risen in response to lower prices. A crude dynamic simulation using demand elasticities published by the USDA’s Economic Research Service (ERS) suggests that these factors would have brought the share of post-2019 grocery inflation explained by the markup up slightly, closer to a tenth.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners. Ernie Tedeschi is the director of economics at the Budget Lab at Yale University and the former chief economist at the White House Council of Economic Advisers under the Biden administration.