The recent rally in stocks, bonds, gold, and bitcoin following Federal Reserve Chair Jerome Powell’s remarks has put the spotlight on a different economic concern: food prices.
This issue has become a hot topic in the presidential campaign, with Vice President Kamala Harris proposing a ban on corporate price gouging for groceries for which most economists believe is an extremely bad idea.
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"We‘ve seen this kind of thing tried in lots of other countries before. Venezuela, Argentina, the Soviet Union…it leads to shortages" and would "cause a lot of harm." pic.twitter.com/DeQLrhHleT
— Leading Report (@LeadingReport) August 16, 2024
As the debate heats up, it’s worth examining what’s really behind the surge in food costs. A New York Fed analysis offers some insights that might surprise you.
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First, let’s address the elephant in the room: corporate profits. While it’s tempting to blame greedy companies, the data tells a different story. Yes, profit margins for food and beverage retailers have increased from 2.9% in 2019 to 4.4% in 2023. But this accounts for only about $10 billion of the $100 billion increase in revenue. In other words, fatter profits aren’t the main culprit here.
So what’s driving up your grocery bill? The New York Fed points to two key factors.
The first is a significant jump in agricultural and livestock prices. Think of it like this: when the cost of wheat skyrockets, it’s only a matter of time before your loaf of bread gets more expensive.
The analysis found that grocery prices tend to react strongly only when commodity prices make big moves. We’ve seen this pattern before, like in 2008 and 2011 when prices spiked, and in 2015 when they crashed.
What caused this recent commodity price surge? The Fed did not specifically discuss this but one possible major factor was Russia’s invasion of Ukraine. This conflict disrupted both fertilizer and wheat supplies, sending ripples through the global food market.
The second factor might hit closer to home: wage increases for grocery workers. Since 2019, wages in this industry have grown 15 percentage points more than in food manufacturing or the overall workforce. While these jobs still pay about $13 less per hour than the private-sector average, the gap is narrowing.
Thomas Klitgaard, the economic research advisor who authored the New York Fed analysis, explained the current situation: “This analysis suggests that the significant moderation in food inflation since the start of 2023 is due to still-high wage inflation for grocery workers being offset by the retreat in commodity prices.”
As we look ahead, it’s clear that food prices will remain a complex and politically charged issue. While proposals like Vice President Harris’s may grab headlines, it will do nothing to help the root cause or fix the problem.
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In the meantime, as you push your cart down the grocery aisle, remember that the price tags you see are the result of global events, labor market shifts, and yes, some corporate decision-making according to the Klitgaard.