The Harris campaign’s economic plan includes a national law against price gouging and excessive profits in the grocery industry. Are grocery stores gouging consumers and can price controls prevent inflation?
Attributing inflation to a sector or corporate greed is dubious. As the great economist Milton Friedman observed, “Inflation is everywhere and always a monetary phenomenon.” The Federal Reserve’s monetary expansionary accommodating Washington’s deficit spending produced inflation’s forty year high in 2022. Inflation has fallen since the Fed raised interest rates. Corporate greed existed long before 2022 and cannot alone be the cause of the recent inflation.
Price gouging is the charging of high prices to earn excessively high profits. Around thirty states prohibit price gouging, including Alabama. As a type of price ceiling, the laws set legal maximum prices for sales. State provisions normally activate only during or immediately after an emergency like a hurricane.
Price controls apply government force to ban something undesirable, like high grocery prices. Price ceilings (and floors, or legal minimum prices) constitute a limited intervention into voluntary market exchanges. Trading requires a willing buyer and seller and the seller will only participate when this makes him better off (or at least not worse off). A price ceiling does not compel sale of the product at the legal price. Sellers will stop selling if they are losing money, so price ceilings cannot lower the price the buyer pays without reducing the quantity available; that is, they create shortages.
Grocery stores sell many items and can be compelled to sell some below cost if they offset losses elsewhere. Firms may not shut down immediately and accept losses in the short run because of prior investments like building grocery stores or if the ceiling is expected to be temporary. Prices below costs will not persist for long.
How profitable are grocery stores? Economists focus on the difference between price and cost, and ideally the marginal cost, or the “markup.” Grocery stores have notoriously low markups, as low as one percent according to some experts. (Grocers’ “cost plus 10 percent” pricing refers to items’ wholesale price, not all costs.) Markups do not appear to have increased over the past three years, nor have industry profits spiked.
The economy overall shows little evidence of profiteering. The Consumer Price Index (CPI) tracks the prices consumers pay; the rate of change in the CPI is the inflation rate. The Producer Price Index (PPI) tracks businesses’ costs for inputs. Since January 2021, the CPI has risen 19.4% while the PPI has risen 25.8%. Prices have risen with costs.
Shoppers might understandably think that steak “shouldn’t” cost $20 a pound or cereal $8. But products do not have a natural price. Economists look instead at the number of competitors in a sector, since competition keeps prices aligned with costs.
The percentage of sales controlled by the four largest sellers in a market, the four firm concentration ratio, provides a rough but reasonable measure of competition. Walmart led in 2023 with a 23.6 percent share followed by Kroger at 10 percent; the top four firms held a modest 49 percent share.
Major grocers are regionally focused, so local markets are more concentrated. Publix’s Alabama market share exceeds its 5 percent national share. But multiple sellers exist everywhere. Leading national retailers include Target, Dollar General, Dollar Tree, and Amazon in addition to Walmart.
The Harris plan would rely on Federal Trade Commission (FTC) bureaucrats to determine unjustified prices and excessive profits. Bureaucrats (and professors) like to think that they can outperform the managers hired by the owners. This is pure hubris.
Price controls allow politicians to evade responsibility for inflation. Richard Nixon imposed wage and price controls in 1971 in response to 5.5 percent inflation. Ms. Harris is particularly responsible for recent inflation, having cast the deciding Senate votes for the American Rescue Plan and the Inflation Reduction Act.
Money growth causes inflation; rising prices are just the symptom. Economy-wide price controls do not promote prosperity. And bureaucrats do not make better economic decisions than entrepreneurs.
Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.
Don’t miss out! Subscribe today to have Alabama’s leading headlines delivered to your inbox.