Episode 39
Episode summary
Who or what is to blame for the jump in inflation from the past few years? There is no shortage of alleged culprits, and one popular theory is that it’s been driven by exploitative prices at the grocery store (aka, price gouging). Caleb and Liz discuss the role of price gouging, and how much blame (or not) it deserves.
Shownotes
Corporate Profits Contributed a Lot to Inflation in 2021 but Little in 2022—A Pattern Seen in Past Economic Recoveries [KC Fed]
Tight Labor Markets Have Been a Key Contributor to High Food Inflation [KC Fed]
Are Markups Driving the Ups and Downs of Inflation? [SF Fed]
Are greedy companies to blame for grocery inflation? We looked at the data [NPR]
What is ‘price gouging’ and why is VP Harris proposing to ban it? [AP]Harris Plans to Ban Grocery ‘Price Gouging.’ What Does the Evidence Say? [NYT]
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Transcript
Liz Wilke (00:00:00) – Hi, I’m Liz Wilke.
Caleb Newquist (00:00:01) – I’m Caleb Newquist.
Liz Wilke (00:00:03) – And this is The Gustonomics Podcast. In each episode, we bring you a little bit of economics knowledge so you can be more informed, use the information in your business or work, or if you need an excuse to turn off football.
Caleb Newquist (00:00:18) – Please remember to rate, review, and subscribe to the show, or share it with an economics curious friend. Anything you can do to spread the word about the podcast is greatly appreciated. Hello, Liz.
Liz Wilke (00:00:29) – Hello, Caleb.
Caleb Newquist (00:00:30) – Are your Halloween decorations up six weeks early?
Liz Wilke (00:00:34) – Well, that would require two things to be true. It would require it to be October and not September, and it would require me to be a person who decorates for Halloween, which is not the person that I am.
Caleb Newquist (00:00:47) – That’s not who you currently are, but something tells me it may be a future Liz Wilke.
Liz Wilke (00:00:55) – I don’t have a crystal ball. But the outlook is dim.
Caleb Newquist (00:00:59) – Let me just tell you something. There is a five-foot skeleton in our house right now, and I don’t know how it got here, but it’s here, and it’s going to be part of this house for the next six weeks. So I couldn’t have told you that that was going to be part of my life. That’s all I’m saying.
Liz Wilke (00:01:15) – The times they do a change. Nobody actually knows how they’re going to change in the future. I think that’s the premise of a TED Talk I heard once.
Caleb Newquist (00:01:22) – Oh, is that right?
Liz Wilke (00:01:23) – It’s very difficult to imagine who you’ll be in five or 10 years. You basically imagine that you’ll be the same version of yourself that you are now, but if you think about who you were five or 10 years ago, you’re a very different person. And the point is that it’s really, really hard for people to think about how they’ll change in the future, even though they know they’ll change a lot.
Caleb Newquist (00:01:44) – Right, which just goes to show that that age-old interview question, where do you see yourself in five years, is a stupid question.
Liz Wilke (00:01:54) – Well, it’s just a question with a very short answer. It is, I don’t.
Caleb Newquist (00:01:58) – I don’t know. Yeah, I don’t know. Okay, Liz, as we have been doing, let’s kick off our show with a little bit of current events. Anything exciting going on in the economics world right now? I know there is, but you’re going to tell us.
Liz Wilke (00:02:19) – Caleb, there are always exciting events in the world of economics knowledge.
Caleb Newquist (00:02:23) – This is what I’ve come to learn, yes.
Liz Wilke (00:02:25) – So the first big bit of news is that we got a new jobs report in the time since our last recording. And it was moderate, I might even say weak moderate, came in below expectations at 142,000 payroll jobs added. And that I think is probably not the right number. I think most people expect a downward revision to that number. We’ve talked about revisions before and why they happen. And I think most people expect that this number is actually not even as good as the final number will be when the data all gets rolled in.
Liz Wilke (00:03:00) – So we might turn from a moderate or weak moderate report to a weak report by the time the revision happens.
Caleb Newquist (00:03:10) – Did the unemployment rate change?
Liz Wilke (00:03:12) – The unemployment rate did not change a lot. So when you make the rounding error, it’s basically the same.
Caleb Newquist (00:03:21) – Okay. So what is it? It’s like 3.8 or 3.9?
Liz Wilke (00:03:26) – 4.2 percent.
Caleb Newquist (00:03:26) – Okay. All right.
Caleb Newquist (00:03:27) – So jobs, it’s getting a little soft, right? We’re still in that dad bod zone, aren’t we?
Liz Wilke (00:03:34) – It’s getting a little soft. The dad bod, we might even say the dad bod’s going to seed a little bit. Dad bod is a wide range of body types, but I would say we’re on the squishier side of dad bod right now.
Liz Wilke (00:03:47) – Yeah. Okay.
Liz Wilke (00:03:48) – And I think that because the other piece of news is that the consumer price index report came out. And that was actually, again, good news. So prices increased 0.2% from the prior month, which just means that they increased two and a half percent over the last 12 months, which is the lowest it’s been. And it’s very good news for the progress on inflation. Yeah.
Liz Wilke (00:04:12) – Yeah.
Caleb Newquist (00:04:13) – As I recall, when the news came out, people were very excited about that report in that it showed, because previous month was 2.9, I believe. And so if this month it’s 2.5, those Fedsters must be very happy with the progress.
Liz Wilke (00:04:32) – They must be very happy. And now they actually enter some pretty rough territory for them where they have to figure out exactly how to land the plane on the tarmac right for that nice soft landing. So everybody expects that we’ll get a rate cut when the Fed meets on September 17 and 18, which is after there was this recording date. And the only question is, you know, will it be 25, 50, 75 basis points? Like how how much and how fast right? Will they be able to bring this rate down?
Liz Wilke (00:05:02) – So that they can so that they can, you know, bring the economy into that soft landing without over overstretching.
Caleb Newquist (00:05:44) – All right, Liz, exciting episode today for this main topic, we’re going to talk about inflation again. And we’ve talked about inflation quite a bit. There have been lots of ideas for keeping inflation in check. And something that made recent news was a proposal from Kamala Harris. And that is she proposed a ban on price gouging by food suppliers and grocery stores. We did a whole episode on food and energy, but food was something we talked a lot about. So anyway, we’re going to talk about this idea, this idea of price gouging.
Caleb Newquist (00:06:25) – And before we get too far, I guess, let’s just level set, right? And explain, Liz, what is price gouging? Well, Caleb, that Oh, is this one of those economic things where there are several explanations?
Liz Wilke (00:06:44) – Clearly, clearly, my my very long pauses are the right signal for you in our time together to tell you that there are many ways to think about price gouging. So conceptually, price gouging is pretty, pretty well defined, right? It’s like an unfair rise in prices, sort of over and above what market conditions require, right?
Liz Wilke (00:07:11) – So it’s like if you’re in a hurricane recovery zone, and the water suppliers, you know, chart are starting to charge like 25 or $30 for a bottle or like $45 for a shovel, not because it costs that much to get that shovel to where it needs to go. But because you know, somebody in that market will pay $45 for it. That’s, that’s like price gouging.
Caleb Newquist (00:07:34) – It’s like unfair, classic price gouging example.
Liz Wilke (00:07:37) – Yeah, unfair profiting off the sort of desperation of people is like classic example of price gouging. There are more academic, there are more academic terms, but basically, like conceptually, we think it’s like, yeah, we think it’s unfair pricing that doesn’t really have to do with the cost of producing something or getting into market. So on the flip side, right, suppose that in a hurricane recovery area, the road was washed out, and you had to helicopter in water that was much more expensive, right?
Liz Wilke (00:08:09) – And that raised the cost to, you know, $20 a bottle, people wouldn’t necessarily think that that is price gouging, right? Because they it’s tightly related to the cost of actually producing the products.
Caleb Newquist (00:08:21) – All right. So in other words, you could make the case, or, or some real purists could make the case that price gouging is simply the price that the market will bear, given a set of circumstances.
Liz Wilke (00:08:36) – Yeah, some people definitely do make that case. But it’s, it’s actually sort of the crux of why it’s very difficult to know what price gouging is when you see it, because there are lots of reasons why prices might go up. And there are, you know, like, you could argue that the price of a thing should never be more than the price of the, or the cost of delivering it. But that’s kind of not how most things in our economy work, right? There’s always a profit margin on something.
Caleb Newquist (00:09:04) – Even if it’s difficult to know price gouging, when you see it, can we actually identify price gouging when it’s happening?
Liz Wilke (00:09:12) – Like across different countries, even right, what’s unfair price increase, what’s an unfair price increase actually varies a lot, right? So they have been surveys, saying, you know, if the price increases due to supply chain disruptions, is it unfair, right? And Europeans and Americans have different opinions about how unfair a price increases due to that versus if the price increases due to an increase in demand, versus if the price increases due to, you know, like a natural disaster, or what have you.
Liz Wilke (00:09:41) – So but it is like, it’s like a, you know, it when you see it, but it’s like personal, right? Because it’s like, it’s a moral judgment, right? About what is price gouging versus not.
Caleb Newquist (00:09:50) – Okay, so let me ask you this. If it’s broadly seen, or the perception is broadly, as a negative thing in an unfair thing and a presidential candidate is proposing that we ban it. Are there already restrictions and laws on the books in places that do that?
Liz Wilke (00:10:18) – There are, and okay, none of them would apply to the situation of inflation . So so take that classic example of, like hurricane disaster recovery, right. So price gouging laws tend to apply to emergency declarations, right, and emergency situations, okay. Price gouging laws that exist are: often, you know, you can’t charge more than the average normal retail price of a thing during a time of an emergency right.
Liz Wilke (00:10:49) – So if a shovel costs $15 before the hurricane, you can’t charge $60 for it after the hurricane, right, no matter what the market requires, yep, and so, unless but it, but it’s sort of contingent on there being a declared emergency right, because you know otherwise you would basically just be saying that people can never raise their prices right above sort of average retail, and that’s obviously very like. We don’t want to. We don’t want to be doing that.
Liz Wilke (00:11:16) – So, given that during the time of inflation there was no publicly declared emergency right, it would be very hard to enforce any of the existing anti gouging laws that already exist on the books, right, but let me just stop you there for a second, because it was a public health emergency.
Caleb Newquist (00:11:34) – So there must be some nuance there. Where it has to be a does it have to be. It must have to meet certain criteria for it to be allowed. Is that right?
Liz Wilke (00:11:46) – Well, so during early during the pandemic, right, you could have applied some of these things, but we didn’t have rampant inflation at the early part of the pandemic, which is right, which is what Kamala Harris is trying to address. Right, that inflation is being caused by price gouging by grocery stores, and they’re certainly I you. During the early stages of the pandemic, when there was a public health emergency, price gouging laws almost certainly would have been effects right and you could have been enforced.
Liz Wilke (00:12:16) – But in 2022, right, when inflation was really starting to tick up at its worst, we were sort of out of almost all of the public health emergencies right related to the pandemic.
Liz Wilke (00:12:28) – So it doesn’t necessarily apply that that you could have applied those laws there, okay, so this is kind of a fun conversation, because I was hanging out with a friend recently and he is not a fan of this idea, this proposal by Kamala Harris, and he says he was talking about price fixing and price controls and then he started making jokes about the Soviet Union, which a chunk of our audience doesn’t even understand because they were born after that.
Caleb Newquist (00:12:58) – So you know the this notion of pricing controls and and and price fixing is. Is that kind of in the ballpark of price gouging, although is is is my friend, who I love very much. Is he conflating these things or are they kind of the same thing?
Liz Wilke (00:13:19) – So you can, you can use price controls for more than one thing, right. You can use price controls because you just want people to have a very steady price for things, which is basically the extension, like in its extreme cases, anti price gouging, right. So you could put in a price control and say, because we don’t want price gouging, you can never charge more than X. Right, for a shovel or for a bottle of water, okay, which when you say you can’t charge more than X, you are implementing a price control.
Liz Wilke (00:13:44) – Right. But you could implement a price control for lots of reasons. There are like price controls on the price of corn, for instance, basically to guarantee farmers right, a specific dollar amount for bushel of corn produced in the United States, right, which aren’t really about price gouging? Right, they’re just about price stability.
Caleb Newquist (00:14:03) – Okay, so we have this proposal from a presidential candidate. We’re not really getting into the. We don’t want to make this like to specifically political, but someone is a someone is proposed, a presidential candidate is proposing a solution to a perceived problem, which is high prices at the grocery store. Right. So my question then, Liz, is price gouging, this, this proposed ban on price gouging? Would that actually do anything about the high prices at the grocery store?
Liz Wilke (00:14:40) – So, I’ll give the very short answer, and then I’ll give the answer I want to give. The very short answer is probably not. That anti-price gouging controls probably wouldn’t do much to affect inflation. But what is definitely true is that the grocery store prices have gone way up, and as have the profits of food manufacturers and grocery stores. Both of those two things together are sort of a recipe for dissatisfaction and resentment. That makes total sense.
Liz Wilke (00:15:15) – The question about whether or not it’s greedy corporate profits to the extent of price gouging, I think, is sort of the thing at stake here.
Caleb Newquist (00:15:25) – Prices and costs, those two things are related. A grocery store, they want to sell the Oreo cookies for a certain price, but they have to pay to get those Oreo cookies, right? And so, the difference between what they sell those cookies for and what they paid to get them, that’s their gross margin. And then that’s something that people look at to determine whether or not a grocery store is actually making more money than it has in the past.
Liz Wilke (00:15:53) – Yeah. So, conceptually, basically, you look at what companies are making for a product versus what it costs them to make that product, right?
Liz Wilke (00:16:02) – Yep. And you think about this margin in terms of a percentage.
Caleb Newquist (00:16:06) – It can be true that a grocery store might raise its prices, right? Because, well, it’s broadly true that it can raise its prices in the anticipation that it’s going to be paying more for those products in the future, right?
Liz Wilke (00:16:26) – Yeah. So, I think there’s two things at play here. And one of which is what you just said, right? So, grocery stores and food manufacturers, they look forward, right? And so, they can be on the cusp of a recovery and say, hey, we’re on the cusp of an economic recovery. Our labor and input and materials costs are going to go up. So, we are going to price our stuff accordingly in order to preserve our margin, right? Because those companies care a lot about their profit margin.
Caleb Newquist (00:16:56) – Because they’re very thin margin companies. These businesses are very thin margins.
Liz Wilke (00:17:00) – Yeah. Grocery stores especially, right? Food manufacturers tend to have higher margins because they have things like brands and whatnot. But grocery stores in particular have very thin margins. So, they sort of price forward and say, we are going to face higher costs in the future. We want to start raising our prices now. And that actually does contribute to inflation, usually in the very early part of a recovery, like the first year.
Caleb Newquist (00:17:22) – Right.
Liz Wilke (00:17:23) – What then happens is that prices actually do catch up, right? Labor becomes more expensive. Materials become more expensive. Inflation is actually part of an economic recovery.
Liz Wilke (00:17:34) – Right.
Liz Wilke (00:17:35) – And so, then the price of those things gets more expensive. But prices for corporations tend to stay the same. So, it squeezes their margin a bit. And then it’s the prices of things contributing to inflation more than the corporate profits part of the equation in later years, like years two, three, four, et cetera.
Caleb Newquist (00:17:55) – Right. So, correct me if I’m wrong. But using this particular situation as an example, early on in, say, 2021, what some economists have found is that, yes, you see an increase in grocery stores gross margin. But what you see in the following year in 2022 was that the margins came back down when we were like, when inflation was basically at its worst. And so, this kind of, and historically, this is what we’ve seen in past recoveries. And so, what a lot of economists have said is that there’s really nothing unusual going on here. This is kind of the natural order of things.
Liz Wilke (00:18:43) – Yeah, that’s basically right. Yeah. So, I think it’s the Kansas City Fed did a study about the contribution of corporate profits to inflation. And so, it is true, right, that corporate profits contributed, especially to the early stages of inflation. That is a separate statement from whether or not they are price gouging, right, which is to create really unfair profits out of a desperate situation.
Caleb Newquist (00:19:10) – All right. Now, as a far as, let’s see, I had a couple notes here. Oh, one other thing. I believe I, you know, and I don’t know, maybe this doesn’t need to make it into the show or not, but there were, I think I read it was in the NPR story that you had sent me, and this is in the show notes for anyone who wants to read it. But there was something about how grocery stores have seen an uptick in their gross margins in the last couple of years. However, one factor in that is the belief that what they call private label goods.
Caleb Newquist (00:19:50) – Have have seen an increase in, in, as a portion of the sales of most grocery stores. So, in other words, when you go to Costco, you get the Kirkland brand, or when you go to a Kroger store, you get the kroger brand or whatever those, those goods have become increasingly popular.
Caleb Newquist (00:20:05) – As, as it is, as prices have risen in general, and because grocery stores can pay less for those goods because they are made, they’re essentially manufactured in-house, they can charge less for them to the ultimate consumer, but they also pay less for them, and so that has led to kind of an uptick in their, their profitability, and so that’s kind of an interesting nuance to this conversation where, if someone is claiming, Oh, grocery stores are making more money, yes, but I think is what a lot of how a lot of these conversations go?
Caleb Newquist (00:20:43) – Is that, yes, that is true. But there’s also this other thing, that’s true, that kind of makes it more complicated, and I think this is- I think that’s that’s my big takeaway from this topic- is that is incredibly complicated: the, the, the, the notion of corporate profits and inflation and how they relate to each other. That is not as straightforward as it may initially seem.
Liz Wilke (00:21:08) – Yeah, I think that’s, I think that’s a hundred percent right. That would also be my takeaway from this. And then, actually I think it’s a very good segue to the last thing that I hope was hoping we would talk about, which is: can you even regulate this kind of corporate profit making, right?
Liz Wilke (00:21:25) – Right, you want to control inflation, and so if you you’re sort of stuck between a rock and a hard place, right, because if you can’t identify price gouging, right and you could even make a very soft definition of price gouging, right, you could just say it’s a, it’s an increase of X percent sort of above.
Liz Wilke (00:21:46) – You know, the cost margin from that’s not attributed to a change in goods allocation, a change in production requirement of efficiency of the company- right, so the company can do lots of things that affect its profit margin, like buy more or sell more of its own label, or get more efficient, or invest in some technology or lower its tax burden or what have you that are definitely not price gouging.
Liz Wilke (00:22:10) – So you could say any increase in your, in your profit margin or your gross margin, that’s not related to any of the things that we think are okay to do is price gouging. But if you wanted to prosecute that, you’d have to open up the books from from top to bottom right of a company and really dig into the nuts and bolts of exactly where they make their money, how they make it, you’d have to argue that any price increases or isn’t due to something that the company did. It would be very, very messy to do that right.
Liz Wilke (00:22:42) – Even if you had a pretty soft definition of price gouging, if you wanted to enforce that policy- and I’m by no means saying that that is a good policy to enforce it would- it would be sort of practically incredibly difficult thing to do to prove that you know something that’s not- unless it’s sort of absolutely obscene and obvious- right is actually an effect of price gap, price gouging as opposed to efficiency or a change in the type of product that a grocery store sells, etc.
Caleb Newquist (00:23:12) – Yeah, I can’t imagine the Securities and Exchange Commission like trying to act on an allegation of price gouging like what are they gonna do? Send in an army of accountants and to dig through everything to determine it’s like: well, how did you come up with the price of this bread? And they dig through like that.
Caleb Newquist (00:23:32) – Is that a level that is probably not a good use of any of those people’s time,
Liz Wilke (00:23:38) – Probably not a good use of any of those people’s time that by the and I will say that none of that takes away from the fact that real households are really experiencing right right like difficulty at the grocery store and really sort of shouldering a lot of the increase in prices that is.
Liz Wilke (00:23:54) – That is very unfortunate and it’s very, in fact, disappointing in some ways that there’s not a cleaner line between, you know, corporate greed and households and the prices that they’re paying.
Caleb Newquist (00:24:05) – Alright, that’s it for this episode. We hope you learned something new and useful for your business. Inflation is complicated. Please let us know what you think of the podcast by leaving a review or share it with a friend or colleague who might enjoy it. I’m Caleb Newquist.
Liz Wilke (00:24:19) – I’m Liz Wilkie. Thanks for listening.
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