The BDN Opinion section operates independently and does not set news policies or contribute to reporting or editing of articles elsewhere in the newspaper or on bangordailynews.com.
Nir Kaissar is a Bloomberg Opinion columnist covering the markets. He is the founder of Unison Advisors, an asset management firm.
Vice President Kamala Harris recently proposed price controls on food to prevent food companies from “exploiting” American consumers. As many have pointed out, this is a terrible idea from the Democratic presidential candidate because price controls lead to shortages and other negative consequences. It is also doubtful that Harris could get such a policy through Congress.
But before we debate the merits, there’s the question of whether food companies are actually ripping people off. Price gouging has been a hot topic 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 simply passing on their own higher costs. At the time, it looked to me like they were raising prices to increase their profits.
For example, the S&P 500’s operating margin – the percentage of revenue that companies keep after deducting operating costs such as materials, wages, rent and utilities – was significantly higher in 2021 than it was before the COVID pandemic, and Wall Street analysts expected it to stay that high. The same was true of the S&P 500 Equal Weight Index, which suggested that most companies took advantage of a post-pandemic surge in consumer demand by raising prices faster than their own costs rose.
After hearing Harris’ plan, I decided to take another look, and am now forced to the opposite conclusion. Operating margins have been declining since 2022. The S&P 500’s margin is back to pre-pandemic levels, and the Equal Weight Index’s is even lower, suggesting that most companies have not raised prices enough to fully offset their own higher costs.
The financial results of the consumer goods sector, which includes food and beverage companies, tell a similar story. The sector’s operating margin rose from 8 percent in 2019 to 10 percent in 2021, but is now only 7 percent. Here, too, it appears that companies have absorbed more inflation than they have passed on to consumers.
My guess is that companies raised prices in 2021 in anticipation of higher operating costs, but those higher expenses didn’t materialize until 2022 or later. This discrepancy resulted in margins rising due to higher revenues in 2021 and then falling in subsequent years as the higher operating expenses were reflected in balance sheets. So overall, companies were not better off than they were before the pandemic, and perhaps even slightly worse off.
A related question is whether mega-corporations have used their size to increase prices more than smaller ones. I see no evidence of this in the numbers. The big three in the staples sector – Walmart Inc., Procter & Gamble Co. and Costco Wholesale Corp. – have maintained their pre-pandemic margins, as have more than half of the companies in that sector. In other words, it is not clear that the largest companies have had more pricing power since the pandemic.
The answer is roughly the same if you isolate the food industry within the staples sector. There is more parity among food companies than in the broader sector. The industry leader is Oreo maker Mondelez International Inc., whose market value is twice that of Kraft Heinz Co., the next most valuable company. Yet Mondelez’s margin growth is the weakest among food companies that have increased margins since the pandemic.
In the food industry as a whole, margins are only slightly higher than before the pandemic. As with the broader S&P 500, companies appear to have mainly tried to pass on their own higher costs to consumers.
To be clear, companies have the right—but not the obligation—to charge as much for their goods and services as the market will bear. In fact, free markets depend on that right. The fact that margins have stabilized since the pandemic is a sign that markets are functioning as intended to match supply and demand, even in very chaotic times. (It is true, as the Harris campaign suggests, that the S&P 500’s operating margin increased 50 percent from the early 1990s to the late 2010s. That’s a discussion for another day, but I’d note that margin expansion does not necessarily lead to higher prices, since that period coincided with some of the lowest inflation rates on record.)
At the same time, limited government intervention is appropriate when companies take advantage of a crisis that disrupts the normal functioning of markets and the economy, as was the case for a time with the pandemic.
But the crisis in the United States is over, and Harris has not provided enough details about how she would deal with price gouging now or in such an emergency. She would do better to abandon the idea, because for now at least, price controls seem to be a solution in search of a problem.
