How Harris could tackle food inflation

Vice President Harris's proposal to ban price gouging on food is making waves in economic circles as traditionalists and business groups fret about shortages while other economists argue it is well suited to the nature of the post-pandemic inflation.

Details on the plan have yet to emerge from the campaign, but Harris’s initial remarks on it suggest it would have four different components, employing a range of policy measures. 

“I will work to pass the first-ever federal ban on price [gouging] on food,” Harris said earlier this month. “My plan will include new penalties for opportunistic companies that exploit crises and break the rules, and we will support smaller food businesses that are trying to play by the rules and get ahead. We will help the food industry become more competitive, because I believe competition is the lifeblood of our economy.”

Parsing that language, the plan could entail a hard-and-fast price control, as suggested by the word “ban.” Progressive economists have also cited state-level price-gouging laws, such as Section 396-r of New York’s general business law, that effectively operate as a price control, though they have shied away from that terminology.

Harris mentioned “support” for small businesses, which could take the form of a federal subsidy, along with increased “competition,” suggesting amped antitrust enforcement from the Department of Justice and the Federal Trade Commission (FTC). The antitrust divisions at those agencies have both been more active under the Biden administration than in previous administrations.

Harris also talked explicitly about civil “penalties” that could be levied against businesses as an additional policy lever.

The Harris campaign did not respond to questions about the details of her proposal, and has not outlined the specifics of how such a plan would become law.

Even so, support of price gouging laws point out that her efforts may be particularly appropriate for the kind of inflation that occurred in the aftermath of the pandemic.

Unlike the wage-price spirals that occurred in previous instances of inflation, price rose steadily throughout the pandemic as booming demand ran into supply constraints and gave businesses ample room to raise prices.

“Price-gouging laws would not prevent companies from maintaining profit margins by passing on cost increases to customers and making more profit. But they would prevent companies from increasing profit margins, at least beyond a certain point, during an emergency. So, they would help extreme price increases,” University of Massachusetts economist Isabella Weber told The Hill.

The Federal Reserve of New York identified examples of sellers’ inflation initially described by Weber and fellow economist Evan Wasner in a recent policy brief that analyzed prices in the grocery sector.

Fed economists pointed out that grocery store margins increased from 2.9 to 4.4 percent between 2019 and 2023 as prices increased over that period by a whopping 25 percent, mostly as a result of increased input costs.

The fact that unit profit increases when costs go up if margins are simply maintained means that margin expansion in such scenarios is particularly troubling, Weber said.

“Companies took advantage of the public perception that the price increases were justified because of the unique nature of the supply shocks,” Weber said. “If the public perception turns, companies might come under pressure to reduce prices.”

Just this week, grocery store Kroger’s head of pricing explicitly described his industry’s margin expansion on top of cost increases, just as many CEOs were doing on company earning calls during the peak of the post-pandemic inflation.

“On milk and eggs, retail inflation has been significantly higher than cost inflation,” Groff wrote in an email that became public as part of a merger trial, as first reported by Bloomberg.

More traditional economists say that enacting a ban on price gouging will lead to shortages as businesses won’t want to produce products they aren’t free to charge what they want for.

Gary Hufbauer, nonresident senior fellow at the Peterson Institute for International Economics, called the proposal “popcorn policy” designed to keep voters in a “good mood” ahead of the election.

“For the most part, that’s what sells,” he told The Hill. “But if you do anything serious, you’re going to get shortages and black markets.”

The FTC has called out grocers for boosting their margins in a report earlier this year.

“In the first three-quarters of 2023, retailer profits rose even more, with revenue reaching 7 percent over total costs. This casts doubt on assertions that rising prices at the grocery store are simply moving in lockstep with retailers’ own rising costs,” regulators wrote in March.

“Elevated profit levels warrant further inquiry by the Commission and policymakers,” they concluded.

The grocery industry, however, has pushed back on accusations of raising prices beyond what they need to cover their expenses.

Greg Ferrara, president and CEO of the National Grocers Association, told Fox Business that members of his trade group made a net profit margin of 1.4 percent in 2023 because of higher food and labor costs.

"We've seen significant wage increases since before the pandemic, but we've also seen enormous increases in commodity prices and while those have come down a bit, they are absolutely elevated," Ferrara said.

Across the economy as a whole, even as the pace of inflation has subsided since 2022, retail prices have continued to rise while wholesale prices have deflated. The difference between the consumer and producer prices indices is near some of its widest levels on record.

Academic research has shown that profit margins have been expanding in the economy for decades, with the profit rate rising from 1 percent to 8 percent since 1980, according to a 2020 paper by Jan de Loecker, Jan Eeckhout and Gabriel Unger.

Those trends appear to be continuing as the profit share of the economy jumped by more than a full percentage point in 2021 before subsiding slightly in 2022. It is still elevated relative to the previous decade and is currently at the highest level since the 1920s.

One of the forces behind the sellers’ inflation the economy experienced since 2021 is likely increased private sector market power enabled by greater concentration across industries.

A 2023 analysis by S&P global about sector consolidation described the current economic period as the “era of superstar firms.”

“In 91 of the 157 primary industries tracked by S&P Global Market Intelligence, the five largest U.S. companies by revenue combine for at least 80 percent of total revenue among publicly traded companies in their respective industries, up from 71 industries in 2000,” analysts found.