Kamala Harris promises to fight inflation

As she unveiled her most detailed economic plan yet this week, Democratic presidential candidate Kamala Harris pledged to fight price gouging in order to rein in grocery costs for voters.

The vice president first raised the federal ban in mid-August, prompting former President Donald Trump to attack the plan as “Soviet-style” price controls. Although Harris released more details on Wednesday as part of her 82-page economic plan, it remains unclear what price increases her administration might consider illegal “price gouging.”

“The bill would set the rules of the road to make clear that big corporations cannot unfairly exploit consumers during times of crisis to make excessive corporate profits on food and groceries,” the Harris Falls campaign wrote in its released policy presentation. Six weeks before Election Day.

High prices — and who or what is responsible for them — have become a major topic in the presidential race, as sky-high grocery bills frustrate Americans and retailers anticipate a bargain-hunting holiday season. Both Harris and Trump have proposed their own solutions to combat inflation, as Americans continue to pay more for groceries, energy, housing and other daily expenses.

Last year, at-home food prices rose just 1%, according to the Bureau of Labor Statistics. But grocery prices are still 25% higher than they were in August 2019, before the supply chain was disrupted and inflation sent prices soaring.

Ultimately, voters will weigh in on the role government leaders should play in pricing companies. Overall, Republicans support fewer economic regulations, although Trump has suggested limiting food imports as a way to lower grocery prices. Economists have warned that this strategy is likely to backfire.

Stopping price increases is a popular idea among voters. 60% of US adults support capping food and grocery price increases, according to a poll conducted by The Economist/YouGov from August 25-27.

However, Harris will face a difficult road to pass any price gouging legislation in Congress, and it remains unclear how suppressing price increases will work in practice.

One of the challenges surrounding accusing companies of price gouging — and the promise to address that — is that the term means different things to different people. Rakin Mabude, chief economist at the progressive think tank Groundwork Collaborative, said the definition is typically defined in two main ways.

Economists and lawyers use a technical definition that refers to when companies raise prices during an emergency, such as doubling the price of bottled water during a hurricane, she said. Thirty-seven US states already have laws prohibiting price gouging in emergency situations.

But some consumers and politicians have adopted a looser definition, Mabud said: the practice of companies charging unfair prices simply because those brands or retailers have the market power to do so.

As the prices of groceries and other goods rose in 2021 and 2022, a popular explanation has emerged: “greedy inflation,” the idea that companies made inflation worse by raising the prices of their products without offering customers more, such as a larger quantity or a new flavor. The once-fringe theory has gained mainstream support, including a study by the Federal Reserve Bank of Kansas City, which found that profit margins contributed “substantially” to inflation.

But many economists — and Federal Reserve Chairman Jerome Powell — don't believe corporate profits are to blame for inflation. Instead, they attribute the sharp rise in prices to a variety of other factors, such as a tight labor market and supply chain issues.

Regardless of what the term means, the companies involved have argued that they are not responsible for rising grocery prices.

“It is important that we get the economic facts right and avoid political rhetoric,” Sarah Gallo, senior vice president of product policy and federal affairs for the Consumer Brands Association, said in a statement in August. “The reality is that there are complex economic factors at play…The industry supports the FTC's consumer protection mission as well as the laws already established by the Department of Justice prohibiting price gouging and unfair trade practices.”

Some retail leaders, incl goal CEO Brian Cornell also disputed price gouging accusations against the industry. In an interview with CNBC's “Squawk Box” in August, he said retailers lose customers to competitors if they raise prices too high.

However, Jaron Martis, director of consumer research at LSEG, said there are some “red flags” that catch the attention of politicians. It analyzed gross profit margins for a cross-section of companies, including grocery stores, consumer packaged goods companies, and restaurants during the years before, during, and after the COVID pandemic. The metric measures the percentage of net sales generated by a company compared to its costs.

Some of those companies, incl Kroger, Procter & Gamble and Domino's Pizzahas higher gross profit margins than before the pandemic. That could reflect company-specific moves, such as Domino's selling more pizza or Kroger customers gravitating to more profitable private brands, she said.

The antitrust challenge of Kroger's $24.6 billion acquisition of supermarket chain Albertsons has also led to increased scrutiny of the companies' pricing practices. The Federal Trade Commission is trying to stop the merger in court, and during the trial, Kroger's chief pricing executive testified that the retailer raised milk and egg prices more than needed to account for higher costs.

In a company statement, Kroger called accusations of price gouging “misleading” and said nearly all of the costs of running a grocery store, including labor and transportation, have risen significantly since 2020.

“We work relentlessly to keep prices as low as possible for customers in our highly competitive industry,” the statement said.

On the other hand, Arun Sundaram, an equity research analyst at CFRA Research who covers grocery stores and consumer packaged goods companies, said he sees no evidence of price gouging in the grocery industry. He said the higher prices come from companies passing on some of the higher production costs to customers.

High margins can come from a variety of factors and are not necessarily a sign of corporate greed or price gouging, he said. They can rise because companies operate more efficiently or because the mix of goods they sell has changed.

Margins can also reflect the strength of a brand and consumers' willingness to bear big prices on trendy or popular items, such as a unique pair of sneakers or a designer dress.

But Sundaram said there may be some merit to the debate in the meatpacking industry, which has faced some lawsuits over price-fixing. For example, JBS's Pilgrim's Pride, one of the country's largest chicken producers, pleaded guilty in 2021 to conspiring to fix chicken prices and pass the costs on to consumers.

Even if Harris never passes price gouging legislation, resistance to higher costs has already begun to affect prices. So far, the response from shoppers and grocers has largely changed the situation.

Consumer goods companies such as PepsiCo and Campbell's soup It has seen its sales volumes shrink as consumers opt for cheaper alternatives or snack less. As inflation has slowed, most have raised their prices less — and less frequently.

“You have a shopper who has seen seven or eight (price hikes) in one year, and you know they're frustrated by that,” said Steve Zurek, vice president of thought leadership at market research firm NielsenIQ.

Walmartthe country's largest retailer and grocery store by annual revenue, said it is cracking down on price hikes by vendors it carries. On an earnings call last month, CEO Doug McMillon said inflation was more consistent in aisles that carry dry groceries and processed foods. He said the major retailer is calling on its suppliers to keep prices stable or reduce them.

“We have less upward pressure, but there are those who are still talking about cost increases, and we are strongly resisting that because we believe prices need to come down,” he said on the phone call.

To address consumer frustration and slowing sales, many food companies have brought back discounts, according to Zurek.

During the pandemic, many manufacturers stopped offering deals because they were struggling to keep shelves stocked. They didn't need to increase demand because customers were already loading their pantries and stocking up on hand sanitizers and toilet paper. Supply chain issues exacerbated the problem, and inflation pushed up sales without the need to purchase more items.

This dynamic has now flipped for many companies. And it's not just food companies offering deals.

goal Cut prices on thousands of items. Walmart Short-term deals on some products have increased, especially in the grocery section. This week, Party City announced price cuts on more than 2,000 products such as balloons and candy as shoppers prepare for Halloween.

However, Zurek said shoppers are unlikely to see grocery store prices decline across the board.

“From an economic standpoint, you never want to talk about deflation, that's almost as bad as inflation,” he told CNBC.

But there were a few examples of companies reversing higher prices. Robert Crane, vice president of sales and sales marketing at J.M. Smucker, said the food company has passed on “commodity relief” to consumers when possible, as is the case with its coffee brands, which include Folgers and Cafe Bustelo. In fiscal 2024, Smucker's profit margins for the coffee division were 28.1%, down from 31.9% in fiscal 2019.

But in early October, Smucker plans to raise coffee prices for the second time this year, in response to rising commodity prices.

As it rationalizes those decisions to major retailers, the company brings in professionals who can explain the green coffee commodity market, according to Crane.

“We'd review the charts, talk about forecasts, talk about what's driving it — is it the weather? Is it driven by speculation?” Crane said.

But that doesn't mean stopping or slowing price increases is simple, said CFRA's Sundaram.

He said a long list of factors led to inflation, including a spike in supply chain costs, wage increases caused by labor shortages and bad weather in regions of the world that produce food such as corn, soybeans and cocoa. He doubts the ability of either administration to achieve a quick solution.

“Because it was a complex set of factors that led to this, there will be a complex set of factors that probably unravel this as well,” he said.