The high cost of living continues to be a top-of-the-page news item. Politicians include fighting inflation as a prominent plank in their campaign rhetoric. The prescription depends on the diagnosis.

As shown in Figure 1 the cost of groceries was in line with inflation as measured by the consumer price index for All Items after the end of the Second World War until 2008 and the global financial crisis. The global financial crisis revealed weaknesses in the increasingly complex and opaque interactions between all parties in the transactions. One consequence was awareness of the newly revealed systemic weaknesses and a fear of the unknown unknowns. Increased risk and uncertainty softened international commodity trading contributing to higher transaction costs and market prices.

From 2008 to date the cost of hourly workers in the grocery store industry stayed in-line with the average hourly wage for the services sector as a whole. As shown in Figure 2 average hourly for workers during the covid-19 pandemic stayed in-line with pre-pandemic trends ranging between seventy and eighty percent even while risking contagion during the pandemic. This suggested that wage-cost push is not responsible for higher grocery prices.

Another candidate for higher grocery prices is profit gouging by industry. The grocery industry’s operating margin, is simply operating revenue minus operating expenditures as a share of operating revenue. This is a proxy for profit margin and is shown in Figure 3.

Until the covid-19 pandemic the operating margin for each industry was stable at a level somewhat lower than post-pandemic levels. Grocery store margins were very low compared to other industries before 2020. After 2021 the grocery industry has made an effort to hold onto to some of its gains, settling in above its pre-pandemic level but down from its post pandemic bounce.

Concluding observations:

1, Until the global financial crisis Canadian grocery prices rose at a rate slower than inflation as measured by the CPI. This deserves further analysis beyond the scope of this post.

2. Labour costs are not a cause of higher overall prices.

3. The grocery industry is posting higher operating margins in the post-pandemic world but it is noted that the industry posted low profit levels before the pandemic.