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Food Prices not an Economic Issue

The US economy is doing well. When you compare it to our main allies Japan, Britain, Canada, Euro Area, and Australia, it is performing better. It is growing much faster, with moderate inflation, and a low unemployment rate. You can see that in the table below from The Economist.

Source: The Economist

The Economist updates this table weekly. The US economy has fared pretty well vs. the mentioned counterparts for a long time. But, that is not what you read in the Media.

Inflation fears dominate the economic discourse and one of the favorite bogeyman is high food price and high food inflation. And, everyone believes it. For example, the related video [1] is just a really schlocky misinformation piece.

So, let’s look at the read data from the Bureau of Labor Statistics over the past two years (the period covered by the video) to check how food prices have fared.

The graph below compares an overall consumer price index (All, black line) with a food-at-home price index (Food, red), and a wages and salaries for all civilian workers cost index (Wages, green). All the indices start with a value of 100 in June of 2022.

Source: Bureau of Labor Statistics

As the graph above shows, food prices rose faster than overall inflation and wages during the second half of 2022. Ever since, food prices have flattened. While wages have risen a lot faster than food prices.

Below see the same visual data on a disaggregated basis.

Source: Bureau of Labor Statistics

Let’s revisit this same data and focus on the 12 month % change in price for these three variables. As shown on the graph below, the 12 month % change in food prices (red line) drops precipitously from over 4.5% as of June 2023 to under 1.5% by December of 2023. And, it continues converging downward towards 1% by June of 2024. Meanwhile, wages keep on rising by over 4% per year.

Source: Bureau of Labor Statistics

Below see the same visual data on a disaggregated basis.

Source: Bureau of Labor Statistics

Conclusion

The reviewed trends over the past two years indicate that food prices have grown at a far slower pace than overall inflation and wages. This entails that workers food-purchasing power has risen over the same period. This is also true for retirees who receive inflation adjusted Social Security and pension benefits.

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Appendix I: Are food price controls necessary?

The analysis so far says otherwise. If wages and inflation adjusted pensions rise faster than food prices, than people’s food-purchasing power goes up, not down (as suggested by the video).

But, let’s study this issue further. Let’s review the cost and profit margins structure of Albertsons and Kroger, the two largest pure-play grocery chains in the US.

Source: companies Annual Reports

As shown above, both chains operate on pretty thin net profit margins of typically much less than 2.00%. Such thin profit margins do not justify the need for price controls. In such circumstances, food price controls may well result in food shortages and reduce US food exports. The nations who rely on the US for food supply could suffer.

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Appendix II: Food price prospect

Labor costs (wages & salaries)

The two supermarket chains have a very similar cost structure except for splitting up cost of sales and G & A expenses differently. We can assume that G & A expenses are dominated by labor costs (wages & salaries) and that a material portion of cost of sales also does consist in labor costs associated with the supermarket chains’ vendors’ labor costs.

Before building a model that would simulate prospective food price increases, we have to figure out how to factor labor productivity and inventory shrinkage (theft).

Labor productivity vs inventory shrinkage

If wages increase by 4%, but labor productivity increases by 4%, the wage increase has no impact on food prices. But, if inventory shrinkage comes in at 4%, it would counter the labor productivity and the 4% wage increase would impact food prices.

Let’s say wages account for 50% of sales (when including both direct and indirect costs (vendors’ wages)), it would translate in food prices increasing by:

4% x 50% = 2% due to the wages increase alone.

This would be the case since the supermarket chains don’t have room to absorb such a wage or labor cost increase given their very small net profit margins of under 2%.

After doing some research, I conclude that labor productivity and shrinkage very much net each other out [2]. Below see the most recent available figures from the Bureau of Labor Statistics for labor productivity for supermarkets (bottom row). From 2010 to 2018 [2], their yearly labor productivity increased by 1.2% per year.

Source: Bureau of Labor Statistics

Now, let’s check the figures from the National Retail Federation for inventory shrinkage.

As shown above inventory shrinkage has remained fairly steady around 1.50% of sales. And, the source of this shrinkage appears nearly equally divided between customers-theft, employees-theft, and errors.

Assuming that labor productivity = shrinkage is somewhat inaccurate [3]. But, it is close enough to facilitate the building of a food price model that is still reasonable.

The model starting point is a 4% wage increase, and wages representing 30% of sales. The resulting impact on food price is:

4% x 30% = 1.2%

Next, the model explores different scenarios with wages accounting from 20% to 50% of sales.

We don’t know what the precise wages/sales ratio is for Albertson and Kroger given the limited disclosure in their annual reports. However, we can be pretty sure that it is at least 20% or more. And, it could be much more. Thus, even the 50% wages/sales ratio may be realistic.

The above tells us that if wages keep on rising by 4% per year, it may be challenging for food prices increasing by only 1% a year. If wages continue rising at the current pace, food prices may very well increase by 2% to 2.5% a year. And, such figures may well remain under overall inflation for quite a while.

Thus, food prices levels and increases are pretty reasonable. Both wage earners and pensioners have experienced a rising food-purchasing power over the past two years. And, this trend is likely to continue.

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Endnotes

[1] Just about everything about that video is either not credible or plain wrong. Just the title is way off… the 400% increase bit. $414.94/$126.67–1 = 228% not 400%.

[2] One may advance that since 2018, self-checkout has become omnipresent. Thus, current labor productivity should have increased by more than 1.2% a year since 2018. A recent Freakonomics podcast on the subject suggests this is not the case because the grocery store labor force is in good part unionized (constraining layoffs). Thus, the adoption of self-checkout has not translated into either labor force reduction or any increase in labor productivity. As another unintended consequence, self-check out has also increased inventory shrinkage (theft).

[3] The equivalence between labor productivity and inventory shrinkage is challenging to assess. On one hand, inventory shrinkage affects the sales figure which is much greater than the labor cost figure. This would entail that the inventory shrinkage is much greater than labor productivity. On the other hand, labor productivity has a compounding effect from year-to-year that becomes pronounced over time. The inventory shrinkage does not compound. This would entail that the labor productivity over time is greater than the inventory shrinkage. On a net-net basis assuming that the two factors are roughly equal and cancel each other out is a reasonable assumption.

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