INSIGHTS: BETTER UNDERSTANDING FOOD PRICES
It was somewhat surprising to hear one of the nation’s largest supermarket chains speak so bluntly about inflation recently when they released their quarterly sales. The chain’s President and CEO, Robert Edwards, commented, “While sales met plan in the first quarter, income was slightly below plan, in part as a result of inflation in produce, meat and pharmacy that was not fully passed along for competitive reasons. In the second quarter of 2014, identical-stores sales are currently running well above 2%, … and we expect to pass along most of the inflation we are experiencing. “
Yes, retailers have to deal with inflation as well as consumers. Something that is not always obvious to shoppers and the media. So let’s put that into a bit of perspective.
At The Food Institute we have been tracking both types of inflation for over 50 years and comparing the two trends. Based on the most recent data from the government, The FI reported that while wholesale and retail prices both edged higher in March, wholesale price advances outpaced those at retail – by slightly more than half a percentage point — in February wholesale outpaced retail inflation by more than a full percentage point. Even more importantly, this has occurred in 20 of the past 24 months.
Obviously, those added costs at the wholesale level have been absorbed by the retailers, including Safeway, who have been very cognizant of their customers’ budgets since the recession took hold a few years ago. Knowing they were faced with increasing costs for many products at wholesale, they cut costs in other areas such as labor, and energy, with one executive noting they are careful that all the lights are turned off when they leave their stores.
But the Food Institute looked back even further, and found that over the past decade, wholesale price advances outpaced retail advance two thirds of the time, and retail food prices were greater than those at retail during only 39 months. During a few months, price increases were exactly the same – the most recent being January of this year.
So what Safeway’s CEO is saying is really not that surprising when you look at the numbers. Food retailers have been holding the line on prices to hold on to their customers. More than ever, shoppers are not tethered to any single grocery store. Competition among supermarkets in major markets can be fierce in itself. But then add in what we call alternative food retailers like warehouse clubs and mass merchandisers like Wal-Mart – which is now actually the single largest food retailer in the U.S. – so alternative retailer is not exactly accurate. And if that is not enough, traditional grocers are also seeing drug stores and dollar stores step into the fray, not to mention convenience stores with whom they have been competing for many years. And now online grocers, including Amazon are looking for their “share of stomach” as well.
Supermarket chains and independent operators across the nation have been absorbing at least a portion of the inflation they have been experiencing at the wholesale level and as Safeway’s president notes, are finding it difficult to continue doing so.
ON THE ECONOMY: SHINY HAPPY PEOPLE
Meet me in the crowd, people, people. Throw your love around, love me, love me. Take it into town, happy, happy. Put it in the ground where the flowers grow, gold and silver shine. This 1991 song by the band R.E.M. features guest vocals by Kate Pierson of the B-52’s, and reached number 10 on the Billboard charts that year.
It’s interesting to think about happy sitting in 2014 and looking back to 1990. Economists have a difficult time measuring happiness. Historically we have come up with a lot of difficult to interpret and explain measures to try to differentiate between monetary values and happiness values, but in the end they all come down to the simple statement. More money, more happy.
Using this measure, the last few years have not been all that bad in aggregate terms. Following the deep recession of 2008 and 2009, per capita income which measures the average income level per person in the country, has been growing fairly steadily. In fact, between 2009 and 2013 per capita income grew by 6.3 percent which is right about in line with 5-year income growth since people were shiny and happy. While it is true that per capita income fell by about 4.8 percent during the recession, since that time average incomes have rebounded back to pre-recession levels.
In recent years, annual per capita income in America has only fallen in three years, during the 2008 and 2009 recession, and in 1990, the year that people were shiny and happy. What has changed?
I would argue three things. First, it seems that expectations are different today than they were in 1990. While like today the country was at war (the buildup to the first Gulf War began in late 1990), America was not withdrawing from a dozen year old conflict like Afghanistan. The homeland was at peace and terrorists would not be bombing the World Trade Center until 1993, and the economy was actually poised for growth with the Internet just starting to be commercialized. In other words, while 1990 was a recession year, the sun appeared to be rising on some good years to come.
In 2014, the opposite is true. The economy has been growing, but the benefits of growth have not found their way to the vast majority of people since both monetary and fiscal policy encourage payments to capital and discourage investments in new businesses. Internationally, the dollar is weak and imports and travel are expensive, and there are no “killer aps” like the Internet entering the consumer economy. After a long and deep recession, most Americans are rightly worried more about their jobs than with priming the demand side of the economy.
Second, the political/legislative environment has become intensely partisan. While in 1990, government in Washington was even more divided than it is today (Democrats controlled both houses of Congress and George H.W. Bush was President), the rancor was much lower. President Bush vetoed 44 bills during his term, and there was a 3-day government shutdown in 1990, but that was also the year that the President broke his promise to not raise taxes, and comprehensive fiscal legislation was passed.
Today, it seems as if Congress and the President are from two different planets, and nobody who works on Federal issues expects much of anything good to come out of Washington for at least the next two years.
Finally, the regulatory environment has changed dramatically since 1990. As I have written before, I think the country really went over a tipping point on regulations during the prior Administration, something that has only worsened under President Obama. According to a recent report by the Competitive Enterprise Institute, since 1992 the Federal government alone issued more than 87,000 new rules. While we all need to obey certain rules (like please stop at STOP signs, or don’t beat up other passengers on the subway) the corrosive nature of being overwhelmed by rules and laws makes it difficult to operate in a normal way. At some point one needs to spend more energy and resources trying to comply with overlapping and often contradictory rules than they spend going about their day to day business. The CEI report estimates that Federal rules alone cost the average family in America nearly $15,000 per year, or about 23 percent of their income. And this does not even take into account the “stifling” effect that they can have on overall productivity and job creation.
Today, while many people are quite happy, it seems as if the burden of rules, partisanship and an overall sense of malaise are helping to keep most Americans from being shiny and happy. The evidence shows that this is really not an economic condition, as the economy is indeed growing at a slow but average pace. Rather it is something that has changed in the American psyche since the last time average incomes fell.
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