Make groceries cheap again

0:00Americans will vote in the midterm elections this week, and many of us are voting on the cost of living. We are not happy about the grocery bill. In recent rally appearances, President Trump has been unsympathetic on the subject. You'll be my guest at Mar-a-Lago. The problem is that for $5,000, the most you'll be able to buy is a hamburger and maybe a small dessert. So surely the Democrats will rally around the simple message of affordable groceries in the closing days of campaigning. They don't like eggs anymore? No, they like eggs, but we have to set that $7 aside for killing Palestinians. Oh dear. There's a lot of incredible things going on around Michigan and frankly this country with these elections here, Anderson. My question, though, is what...

0:45Oh, dear. Listen, many of us blame supermarkets for driving up prices and putting the screws to us. But what if that is not what's going on? Coming up on Today Explained from Fox, another explanation for high grocery prices and how to fix it. Support for Today Explained comes from Anthropic, the team behind Clawed. Anthropic is a public benefit corporation founded on a hard question. That question is, how do we make sure AI goes well for people? They're working on it, publishing what they find, even when it's uncomfortable. There's hope in hard questions. Ask your hard question at clawed.ai slash today explained. That's C-L-A-U-D-E dot A-I slash today explained. Support for the show today comes from Bill. When it comes to managing money,

1:31forget the hype and look at results. Bill boasts a trillion dollars of secure payment transactions, one trillion dollars, and that powers their bill pay tools. Instead of just moving money, Bill is powering the financial operations of nearly a half million customers. Ready to talk with an expert? Visit Bill.com slash proven to get started and grab a $150 gift card as a thank you. Terms and conditions apply. See offer page for details. Thank you. Such an old-fashioned term, but a beautiful term. Today explained. It sort of says a bag with different things in it. I'm Roger Karma. I'm a staff writer at The Atlantic, where I cover economics and economic policy, and I write the Work in Progress newsletter. Roger, everybody is feeling like

2:15grocery prices are in a terrible state right now. Some of that is vibes and some of it is real. What is real? How bad are things exactly? Things are pretty bad out there. So the way that I tend to think about this and the way that a lot of economists think about affordability is not just the price level, but the relationship between prices and wages, right? The more money that you're making, the more you can afford relative to whatever prices you're paying at the grocery store. And with groceries, in the approximately five years leading up to the pandemic, wages grew about 30 times faster than grocery prices. People were used to year after year, their paychecks were going further and further at the grocery store.

3:05That was the baseline going in. Since the pandemic, the price of groceries has risen faster than the overall inflation rate, has risen faster than people's wages. Cumulatively, they've risen about 30%, which is more than wages have increased over that period. Maybe I'm bugging, but I just spent like $60 buying enough food to make like a meal and a half for the food that I have to eat in order to live or I die. I'm looking at damn price it on stuff, y'all. And this shit right here is just fucking crazy. Stuff that used to be a dollar is now $5 a box. I thought Trump was supposed to make this shit cheaper. $35 for a handful of staples that fit in a single bag. And yes, I splurged on some Cheetos. Sue me. And so when people are upset about this,

3:56there's a reason. These are the most salient prices in their lives. They're seeing this day after day, week after week. And the change has been enormous from more and more affordable to all of a sudden out of reach. There's an assumption being made here. And the assumption makes sense that when food gets more expensive, and I think for a lot of us, you recognize it in like three or four things that you used to get. Maybe like an Amy's burrito that used to be $1.99, now it's six. But anyway, you assume, one assumes that it is the grocery store that's doing this. Okay, they used to charge $2 for my favorite burrito, and now they charge six for my favorite burrito. They have done something here. You, I think, would say it is not

4:36that simple. What's actually going on? What is raising prices? So the problem with the it's the grocery store's narrative is the profit margins for grocery stores, like the amount of money that they make on each sale relative to the cost that they pay, is razor thin. So the average profits that a business in the U.S. makes, the average profit margin is about 8% to 10%. And I think what is actually going on is a combination of a few things. The main one is that grocery stores are just paying much higher prices themselves. The cost of their food has gone up a lot that they're purchasing. And the cost of their labor has gone up. If we all remember the great resignation, the huge increases in wages for low-income workers,

5:29well, a lot of those workers work at grocery stores, and they're getting paid more, which means those costs get passed on to consumers. But part of the reason is that there are actually a lot of different players in the food supply chain before it ever gets to the grocery stores, and those actors are actually making a lot more money. So when you think about the much larger food supply chain, it starts with farmers, right, who grow crops, they raise livestock. But then there are like food processors and meatpackers who take those raw inputs and turn them into ingredients like flours and oils and cuts of beef. Then there are food manufacturers who take those ingredients and turn them into finished products

6:12like cereals and frozen meals and snack foods. And then there's these distributors who deliver them to the grocery store. So this is the sort of food supply chain. And those other parts of the supply chain, the non-grocery store parts, are responsible for about three quarters of the total cost that Americans pay for food. The two sort of nodes in that chain that don't make any money are the two ends. Grocery stores and farmers actually make very little. But a lot of these middlemen in between, so if you take the, I mentioned earlier that grocery stores make one to three percent profit margins. Well, egg producers like Cal Main and meat packers like Tyson's, they make anywhere from four to 12 percent.

6:56And so as as one source put it to me in my reporting, like if you're trying to figure out how to reduce prices, you have to ask, where is the money being made? And the answer is, it's all right here in the middle. I mean, you're telling me something that I do not think is well known. Like I said, I think most people blame the grocery store. But OK, we have some awareness that the guys in the middle are making decent margins. And they, in fact, are the ones that are likely responsible for at least some substantial part of why our groceries are more expensive. When they are asked, why are you doing this to us? What do they say? Do they have something that they blame? What they will say are things like, well, look, during the pandemic, there were a lot of supply

7:42shocks that benefited us. And we, not that we had no choice but to raise prices, but we weren't doing anything crazy. So you'll remember early in the pandemic, there was a bunch of slaughterhouse shutdowns because these conditions were really close quarters, they were unsafe. And so a lot of slaughterhouses that usually do beef packing and things like that had to shut down. And as a result, the beef packers that were able to stay in business saw their profits skyrocket. So Tyson's is an example of this, is one of the biggest. And they saw their beef packing profits more than triple from 2019 to 2021. During the Russia-Ukraine war, Bung, which is a commodities trader and a lot of other commodities traders that basically they buy and they store

8:32and then sell crops, they saw their profits nearly quadruple from 2019 to 2023 thanks to a bunch of global crop market disruptions like the Russia-Ukraine war. And what these companies will say is, look, it's not our fault. There is a natural disruption happening in the world that all of a sudden makes our product more valuable. And now that there's a shortage, of course, we're going to charge higher prices. So in this country, we have grocery stores that are enormous. We have enormous chains, right? Like Walmart, Target, places where people get groceries. And then there are just smaller grocery stores, whether that's my local bodega or some, you know, mom and pop in DC that has like three, you know, three stores

9:15in the whole city. Are all of those grocery stores dealing with the same kinds of challenges as they deal with producers in the middle making things more expensive? So one thing I didn't even realize until I started researching this piece is that there are only four chains that own more than 5% of the total national grocery market. So you have Walmart is the biggest. It's about 20%. And then you have Costco, Amazon, and Kroger, which are each 8%. But that altogether, these big chains represent less than half of the total market. And these kind of two segments of the market experience pricing very differently. And the reason is because if you're Walmart and you're negotiating with Pepsi, you are negotiating what price you are going to pay from Pepsi in order to have Pepsi in your

10:15stores. If you're Walmart, Pepsi needs you because you have access to a lot of customers. And so you have the power to negotiate lower prices because you know that everyone wants the best placement for their product in your store. There's one study I found really helpful here where a team of food economists, they compared the prices of so-called staple foods. So there's things like eggs and milk and rice, and they compared them among 140 small grocery stores and their closest nearby supermarket. And they found that all these items but one was more expensive at the small grocery store and that the range was anywhere from 10 to 54% more expensive. So you had some, I think it was rice was the example where this was more than 50% more

11:06expensive at the smaller stores. And that's despite the fact that a lot of these stores have like buyers associations, they form buyers clubs. It's still not nearly enough to compete with the big chains. I imagine many people are listening to this and they're like, it's the damn middlemen. What can anybody do? And because we live in a capitalist economy in which profits are considered to be a good thing, the only people who can really go after the middlemen would be the government. Is there any argument here that maybe the government should intervene on behalf of us with the middlemen who are jacking the prices up? How might that work if it's feasible? I think a great argument for this revolves around something

11:54that the government already does today. So right now, for military families and for public schools, the government actually purchases food in bulk from these middlemen suppliers. And because it purchases food in bulk, it is able to negotiate much lower prices, kind of like Walmart is currently able to negotiate lower prices. And as a result, military families and schools actually pay far lower prices than a lot of people pay at the grocery store because the government purchased that food on their behalf. And so recently there was a proposal from the same organization, the Kitchen Table Project, which said, well, what if the government just did that for everybody? What if we had a public option for food purchasing where the government would enter a partnership with any willing grocer.

12:45It would purchase on behalf of those grocers. The government could demand much lower prices, and that would probably have knock-on effects that then also not only helped out people shopping at small stores, but would actually probably really force Walmart and some of these other bigger stores to compete more on lowering their prices because now they don't have a natural built-in advantage. All right. It's a provocative idea. When we come back, we're going to dig into it some with an economist, Roche Karma from The Atlantic. Thank you so much for taking the time. We appreciate it. Thanks so much for having me. It's been a pleasure. Support for Today Explained comes from Chime. Life adds up fast. A trip here, a dinner there,

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16:55out there that perhaps the U.S. government should engage in direct price negotiations with food suppliers in an effort to bring down food prices, which many, many Americans are upset about. The first thing I thought was, oh, God, are we going to do price controls in the United States of America? But maybe I'm being unfair. Tell me exactly why I, and I think others, have this kind of knee-jerk response to the government getting involved with the price of food? Well, probably the knee-jerk response comes from anxiety about intervening in the price system, which is this very complicated and highly efficient system wherein sellers signal to buyers what things cost. And if the government gets in the middle of that decision,

17:46it can screw up that signal in ways that have not always worked very well. Probably the best example is rent control, that is fixing the price of rent, which there are many examples where it's led folks to take apartments off the market or it's signaled builders, you know, don't build here, build there. So the minute you start talking about price signals, yeah, people understandably get nervous. Let me ask you something broadly that I think many people have questions about. You have advised a U.S. president that is a very big deal. We are about to vote in midterms in this country, and many people are about to vote on the fact that they think life has gotten too expensive. Things are unaffordable.

18:26And so it always raises this question every couple of years. How much control does the president of the United States or our lawmakers on Capitol Hill actually have over grocery prices? Very little. A vote for Trump means your groceries will be cheaper. Very little. It's really one of the prices that's hardest to do anything about. And by the way, just to be clear, presidents have very little control over almost any price out there. The gas price is one that presidents always get credit for or blamed for. And in most cases, with one glaring exception and a timely glaring exception, presidents have nothing to do with the gas price either. The glaring exception is the Trump administration because of the war in Iran, which is a war of choice. That's really jacked up prices

19:17in the energy sector, particularly gas and diesel. So that's an exception. But for the most part, presidents can't do much about prices. All right. So that brings us to the proposal to have the government get involved here. Explain to me the proposal. OK. While presidents can't do much about overall prices, there are particular areas where interventions might make a difference. The Center for American Progress has proposed that we establish a temporary price cap on a core basket of essential goods in your grocery basket. So things like eggs and bread and rice and fruit and milk and things like that. And the idea would be that if grocery stores sign up for this, it's a temporary price cap and it's a voluntary price cap.

20:13They would be agreeing to hold the cost of this market basket, this subset of groceries at a fixed level around where it is right now for a period of time. Now, why would they do that? Yes. Yes. So we offer various bribes. I mean incentives, excuse me. We offer various incentives for them to do that. Probably the most notable is capping their credit card swipe fees. I don't think probably most people at the grocery store know this. I know every time I buy groceries, I put it on the credit card. Well, those fees average about 2% of each transaction. And they're usually a grocery retailer's highest cost after their labor cost. So by giving them a break on their credit card swipe fees, we provide an incentive for them to agree to this program where for a period of time they hold fast

21:06the price on this basket of groceries. In the first half of the show, we heard from Roche Karma that the thing that's driving up prices is not so much grocery stores as the middlemen who process and produce the food, meat packers, food manufacturers. If what you're saying here is the grocery stores themselves get a break for participating, that incentivizes them. But if the real problem or a big part of the problem is the middlemen, how is the problem of the middlemen solved by this, if at all? You really have to do both, Anne. This is a walk and chew gum moment. We can and should go after middlemen, excessive concentration in that part of the food production industry. Roger's piece is spot on in that regard.

21:53But that takes a long time. And by the way, cost savings that trickle down for most kinds of actions, I've been engaged in that sort of thing for a while, and it doesn't always materialize in any kind of a timely fashion or even at all. There's a lot of leaks in the bucket when it comes to that approach, so we should definitely do it. was that we needed something that was going to be pretty guaranteed to help shoppers get a break on a fixed chunk of what we knew they would be buying at the grocery store. And that's why this Center for American Progress program we thought was potentially useful. Okay, so let's talk a bit about actual numbers. We often talk about families of four when we're talking in this country about what things cost, what groceries cost.

22:50So a family of four, if we were able to go ahead and get this done with this particular basket of goods, in a year, how much does a family of four save? Well, we'd wrap it up pretty slowly to get the system used to it. So in the first year, not that much, about $100 for the year, which I admit that many folks wouldn't notice. In the second year, more like $200, and maybe that's a little better. So again, it's a very hard price to do much about. Remember, we're only hitting a small part of the market basket, and we think that's important, given the comments I made at the beginning of our conversation about being careful not to screw around too much with the price system because it's sending really important

23:29signals out there. But in this case, we think we can do so in a way that's pretty benign, especially if we kind of roll things in gradually. People have become very cynical these days. I think we're sort of stuck in a moment of, I really want to complain about this, and I understand why that is. And so there's an impulse to say, like, throw up our hands and say, nothing's ever going to fix this. It sounds like you don't believe that. You think there are policy solutions that really could move the needle here. I firmly don't believe that. So you're right. And I'm glad you heard me say that, because I don't know that I've said out loud that I firmly don't believe that, but I don't. And I'm more optimistic than that.

24:08I do think we're going through a period of massive discontent with precisely these issues. And I understand it. I don't think people are just being, you know, unduly whiny or something. They went through a price shock. So here's some numbers you may not be familiar with. Between 2015 and 2019, so four years before the pandemic, grocery inflation was actually weirdly low. It was about 0%. I don't mean per year. I mean, it didn't go up at all over those four years. And then it went up about 25% after the pandemic. So, you know, people just didn't have time to get used to it. So I like these policy ideas that I'm suggesting, of course, I wouldn't suggest them if I didn't. And I hope that ambitious politicians give them a try.

24:58But there's also a matter of just time and giving folks a chance to acclimate to these higher price levels. That will require, of course, income gains and wages would have to grow. It is true that if your income keeps growing and the inflation kind of gets back to what it used to be, maybe not zero, but something like one, one and a half, which, by the way, was where grocery inflation was headed before Trump got up to all this inflationary policy with tariffs and the war. So I do think there is a solution to this, which doesn't involve really any messing around with the price system. And that's just letting enough time pass so that both lower inflation and income growth can give people the time they

25:44need to acclimate to the new and higher grocery price levels. Jared Bernstein is an economist. He's a policy fellow at the Center for American Progress and the Stanford Institute for Economic Policy Research. He's a former chair of President Biden's Council of Economic Advisors. Denise Guerra and Hadi Mouagdi produced today. Amna El-Sadi edited. David Tatteshore and Bridger Dunnigan engineered. And Gabriel Donatov checked the facts. I'm Noelle King. It's Today Explained. you As soon as autumn rolls around and you swap your iced lattes for pumpkin spice, that's your signal to start thinking about the holidays, the decor, the gifts, the shopping lists, but more importantly, the holiday treats.

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28:10This holiday season, whether you're going all out or keeping it simple, make it really Philly good. Find your favorite holiday recipe at creamcheese.com.