In a recently released report, the Federal Trade Commission (FTC) has highlighted margin expansion as a significant factor contributing to the hike in food prices in the United States. The report has sparked debates among economists regarding the extent to which profits or cost increases are driving inflation.

Following the COVID-19 recession, profits and inflation experienced a simultaneous surge, leading to discussions on whether elevated profit margins have become a cause of sustained inflation. While supply chain disruptions initially allowed companies to increase prices, experts have debated whether these inflated margins are prolonging higher prices in the grocery sector.

The FTC report identifies concentration in the grocery industry as a key driver of recent price increases. Larger retailers and wholesalers with significant leverage over their suppliers were able to take aggressive actions, leading to increased profits. Retail grocery revenues in 2021 and 2023 exceeded costs by over 6 percent and 7 percent respectively, significantly higher than the previous high point of 5.6 percent in 2015.

The report challenges the notion that rising prices are merely a reflection of increased costs for retailers. It suggests that certain firms used rising costs as an opportunity to further hike prices, resulting in elevated profit levels even as supply chain pressures eased. The FTC calls for policymakers to conduct further inquiries into the matter.

This report comes as President Biden focuses on addressing high prices and "junk fees" imposed by large businesses ahead of the 2024 election. However, Biden faces challenges in convincing voters about his handling of the economy, particularly in light of years of high inflation. According to a recent Gallup poll, only 37 percent of Americans approve of his economic policies.

Economists have noted similar trends of margin expansion in other industries, particularly in the automotive sector. Car manufacturers have been able to maintain higher profit margins compared to their suppliers, even as supplier costs remained steady. This pattern suggests that margin expansion may be a self-sustaining driver of inflation.

The University of Massachusetts Amherst economists have characterized pandemic inflation as a "sellers' inflation" resulting from firms with significant market power in concentrated industries raising prices. They argue that sector-wide cost shocks and supply bottlenecks provide cover for cartel-like coordination among competitors. However, a definitive picture of such inflationary spirals is yet to emerge.

Federal Reserve economists have also acknowledged the role of profits in driving inflation. They have highlighted that soaring markups accounted for more than half of inflation in 2021, whereas markup growth had minimal impact in the decade before the pandemic. The researchers attribute this increase in markups to anticipated cost hikes rather than an increase in monopoly power.

Contrasting the Federal Reserve's perspective, the FTC report on the grocery industry presents a different narrative. It emphasizes the concentrated downstream retail power that exerts influence over supply chains to boost profit margins. The report highlights significant consolidation in the grocery sector, with the four largest companies accounting for over 30 percent of sales in 2019.

The FTC report also criticizes big grocery retailers for implementing policies that impose strict delivery requirements on their suppliers and threaten fines for noncompliance. Critics argue that such policies drive up costs and disproportionately impact low-income consumers. The report urges policymakers to address these issues and investigate competition concerns in the grocery industry.

Although supply chain pressures have eased, and inflation has decreased in the past year and a half, profits remain elevated. Data from the Commerce Department indicates that profits reached an all-time high of $2.8 trillion in the fourth quarter. Profit margins have expanded for two consecutive quarters, accounting for 12.2 percent of GDP.

Left-leaning economists support the FTC report, stating that expanded margins raise concerns about competition. They question whether margins have returned to normal levels, even with the normalization of the supply chain, which could indicate a lack of competition in the market.

The FTC findings align with a 2022 United Nations report, which suggests that price-setting firms in highly concentrated markets amplify the effects of cost increases, leading to inflation.

While further research is needed to better understand the relationship between profit margins and market power in the aftermath of the pandemic, the FTC cautions that the effects of boosted profits in the grocery sector continue to have economic implications.