Dr. Dan Sutter: Price Gouging, Inflation and the Illusion of Price Controls

The Harris campaign's economic plan calls for a national law against price gouging and excessive profits in the grocery trade. Are grocery stores gouging consumers, and can price controls prevent inflation?

It is questionable to attribute inflation to one sector or to corporate greed. As the great economist Milton Friedman noted, “Inflation is everywhere and always a monetary phenomenon.” The Federal Reserve's expansionary monetary policy, which supported Washington's deficit spending, led to a forty-year high in inflation in 2022. Since the Fed raised rates, inflation has fallen. Corporate greed existed long before 2022 and cannot be the sole cause of recent inflation.

Price gouging is the charging of high prices to make excessive profits. About thirty states, including Alabama, prohibit price gouging. As a type of price ceiling, the laws set legal maximum prices for sales. State regulations usually only take effect during or immediately after an emergency such as a hurricane.

Price controls involve government pressure to prohibit something undesirable, such as high food prices. Price ceilings (and floors, or legal minimum prices) represent a limited intervention in voluntary market exchange. Trade requires a willing buyer and seller, and the seller will only participate if he is better off (or at least not worse off) by doing so. A price ceiling does not compel the product to be sold at the legal price. Sellers will stop selling if they lose money, so price ceilings cannot reduce the price the buyer pays without reducing the quantity available; that is, they create shortages.

Grocery stores sell many items and may be forced to sell some of them below cost as they make up for losses elsewhere. Businesses may not close immediately and accept losses in the short term because they have already invested in building grocery stores previously or the cap is expected to be temporary. Prices below cost will not last long.

How profitable are grocery stores? Economists focus on the difference between price and cost, and ideally on marginal cost or “markup.” Grocery stores have notoriously low markups, as low as one percent according to some experts. (The “cost plus 10 percent” pricing for grocery stores refers to the wholesale price of items, not all of the costs.) Markups do not appear to have increased in the past three years, nor have industry profits skyrocketed.

The economy as a whole shows little sign of profiteering. The Consumer Price Index (CPI) tracks the prices consumers pay; the rate of change in the CPI is the rate of inflation. 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 a steak “shouldn't” cost $20 a pound or cereal $8. But products don't have a natural price. Economists look instead at the number of competitors in a sector, because competition ensures that prices match costs.

The percentage of sales controlled by the four largest sellers in a market, the four-firm concentration rate, provides a rough but reasonable measure of competition. Walmart led in 2023 with a 23.6 percent share, followed by Kroger with 10 percent; the four largest firms had a modest 49 percent share.

Large grocers are regionally focused, so local markets are more concentrated. Publix's market share in Alabama exceeds its national market share of 5 percent. But there are multiple sellers everywhere. In addition to Walmart, leading national retailers include Target, Dollar General, Dollar Tree and Amazon.

The Harris plan would rely on bureaucrats at the Federal Trade Commission (FTC) to identify unfair prices and excessive profits. Bureaucrats (and professors) like to think they can outperform the managers hired by the owners. This is pure hubris.

Price controls allow politicians to avoid responsibility for inflation. Richard Nixon imposed wage and price controls in 1971 in response to 5.5 percent inflation. Mrs. Harris is particularly responsible for recent inflation, having cast the deciding votes in the Senate for the American Rescue Plan and the Inflation Reduction Act.

Money supply growth causes inflation; rising prices are just the symptom. Economic 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 at the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.