Vice President Kamala Harris proposed price controls on groceries to stop food companies from “gouging” American consumers. It’s a terrible idea from the Democratic presidential nominee, as many have already pointed out, because price controls lead to shortages and other bad outcomes. It’s also doubtful Harris could push such a policy through Congress.
But before debating the merits, there’s a question about whether food companies are in fact gouging people. There’s been talk about price gouging ever since inflation spiked in 2021, so in early 2022, I looked at the financial results of companies in the S&P 500 Index to see if they were exploiting consumers or merely passing on their own higher costs. It looked to me at the time that they were raising prices to beef up profits.
For example, the S&P 500’s operating margin — that is, the percentage of revenue companies keep after deducting operating expenses such as materials, wages, rent and utilities — was meaningfully higher in 2021 than before the COVID pandemic, and Wall Street analysts expected it to remain that high. The same was true for the S&P 500 Equal Weight Index, which suggested that most companies were exploiting a post-pandemic surge in consumer demand by hiking prices faster than their own costs were rising.
After hearing Harris’s plan, I decided to take another look and am now compelled to the opposite conclusion. Operating margins have declined since 2022. The S&P 500’s margin is back down to where it was before the pandemic, and that of the equal weight index is even lower, all of which suggests that most companies have not raised prices enough to fully absorb their own higher costs.
Financial results for the consumer staples sector, which is where food and beverage companies reside, tell a similar story. The sector’s operating margin climbed to 10% in 2021 from 8% in 2019, but it is now down to 7%. Here, too, it appears that companies have absorbed more inflation than they’ve passed on to consumers.