Yesterday President Trump announced a cut in tariffs on beef, coffee, and other foods. I wanted to make an observation and a prediction.
My observation is that not imposing the tariffs in the first place would have been better.
Here’s the prediction. To use economic jargon food prices will turn out to be downwards inelastic. In other words although prices rise quickly when a tariff, for example, is imposed, removing the tariffs won’t cause prices to return to the status quo ante. At least not nearly as quickly. Competition among retailers won’t bring them down quickly.
One of the reasons that’s the case is how concentrated the grocery business has become. There used to be dozens of major chains and thousands of mom-and-pop grocery stores.. Now there are just a few chains and they don’t actually compete with each other. And then there’s the effect of regional concentration.
I don’t think that national grocery chains should be allowed to exist but I’m a dinosaur.
The short version of this is that prices went up fast. Don’t expect them to come down fast whatever happens.
It’s also the case that Trump could raise tariffs again. He’s a master at breeding uncertainty and retailers are unlikely to reduce prices until they can be certain that tariffs won’t return, which just adds to the factors you cite.
Beef might be different though. If fewer cattle are being raised for environmental constraints, then imports are the only option.
This is what happened in our inflationary period in 21-22. We had supply shortages so companies bumped prices. When the shortages went away prices didnt drop. This was abetted by having too much money dumped into the economy and Fed being slow.
Steve
Higher prices may be “sticky”, but they also affect consumption. Trump would have been better off rebalancing tariffs without threats or wild swings but, He is Trump.
It seems to me that in the blogpost and comments there is a conflation between the general price level and narrower prices of categories of goods and services.
There is no reason to expect prices to fall or have fallen. The 20% increase in prices (inflation) was due to the Fed monetizing a spending spree. And worse, much was just cut people a check; Green New Deal spending. Read: no useful goods and services to match the spending party. Mostly unproductive pork. (Including yet another bankrupt solar deal looking for savior capital that just hit our desk; and of course all the spending on EV’s that was just waste as reality sunk in to the Big 3 and luxury automakers on the unsubsidized demand.)
There has been no contractionary move in the money supply. Or robust increase in goods and services. That leaves only a big increase in money velocity to cause a price deflation. But there has been none. So why would one expect a drop in the price level? The best you could hope for is a money/output balance that produced a lower inflation rate. And it has: 3%.
With regard to narrower price measures, tariffs and the like, you are talking about what used to be called “cost push” inflation. but it wasn’t. It was an increase in the price of x,y or z good or service. And in a stable money supply environment you would have fewer dollars to buy good or service a, b and c= offsetting downward price pressure.
Can you have a good constricted in supply and so pervasive it is a de facto inflation? I suppose so. Energy would be first on the list. Perhaps steel or trucking.
I don’t think grocery prices qualify. Large chains existed before 2020. If it was so easy to control prices now, it would have been then. Yet it was and is a 1-2% margin business. That’s brutal.
I’ve been doing what I do for 30 years now. I’ve seen all kinds of commodity/input price swings. Nickel, wheat, steel, lumber, plastic resins….. They sort out in time. One recent example. A recently divested portfolio company had a large exposure to eggs. We got in front of the bird flu issue and priced up. But you can bet your bottom dollar buyers watched the price of eggs and as soon as they started to decline they were pounding on our door.
It makes good bar room talk about rapacious businesses (and after all, its only them who are greedy, right? critics aren’t greedy (snicker)); but business is brutal outside of monopoly or government subsidy.
Last thought: it is a legitimate debate as to whether Trump is right or wrong about the fed easing. After all, we are still at 3% inflation. But what about 6-12 months from now? Will the Fed have been too late?
They always have been.
Note that nothing you said contradicts my prediction.
I don’t use the word “inflation” because when I say “inflation” or “price increases” I mean different things. Inflation is general inflation—a decrease in the value of a dollar. The price increases are consumer price increases.
Also note that the words “greed” or “greedy” do not occur in my posts but “competition” does. I think that competition among retailers is good and tends to produce lower prices. What do you think?
That there has been considerable consolidation in retail grocery over the last 50 years is simply a fact. Do you dispute it? I can see it just by looking around me. Forty years ago there were more different retail grocers than there are now. The biggies, Jewel and Dominicks, were not owned by larger chains. When Mariano’s opened 20 years ago it wasn’t owned by a larger chain. Now Jewel is owned by Albertsons, Dominicks is gone, and Mariano’s is owned by Krogers. There were several mom-and-pop groceries within blocks of where I’m sitting. Now the mom-and-pops are gone and there are just four or five nationwide chains: Kroger’s, Albertson’s, Walmart, Costco, Aldi.
IMO the value of economies of scale decline or even vanish at a certain point and that point was long ago. That’s an opinion. It’s disputable with facts. I also believe that very large companies are inherently less efficient than smaller companies since bureaucracies grow faster than linearly and every organization that’s large enough is a bureaucracy.
IMO the real advantage very large companies possess is financial—they can manage their debt more easily than small ones. As J. Paul Getty put it when you owe the bank $100 that’s your problem but when you owe the bank $100 million it’s the bank’s problem.
The supply shortages were real and very well documented. As I recall we spent some time on the topic and why ships were piling up at our ports. Supply and demand curves are also real, so we had prices increase due to supply shortages. It is pretty well documented that companies got ahead of this and increased prices they were charging faster than what they were paying, which is pretty normal I think as they dont want to lose money. Some people have now decided that you only call it inflation if it is caused by the Fed/govt, but what is pretty clear is that a big part of that inflation which peaked at 9% was partially due to supply shortages.
Some people also believe that if the Fed had acted sooner they could have countered the effects of the supply shortages and for that matter the effects of the Trump and Biden stimulus packages. Maybe, but I think you need a Fed with magic powers to do that.
Steve
Sort of off topic but I am trying to get a handle on hiring. The wife watches CNBC in the morning and some people have made the claim it’s the worst job market since 2008-2009. My daughter has been a recruiter for over 20 years and she and her colleagues agree. However, it doesnt seem to be getting the general coverage I would expect if true. Adjusted for age LFPR is just a hair away from a record high and UE is low, so it seems like people have jobs. What am I missing?
Steve
The unemployment rate among recent college graduates is the highest it has been in 10 years and nobody can see how that changes in the near term. Meanwhile, jobs on offer in manufacturing are going without applicants.
We have a serious labor mismatch.
For myself I have been more or less forced into retirement. Nobody’s hiring.