Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / Why Grocery Margins Are Rising Faster Than CPI
Transcript
- Lucas: So the latest PCE data came out Thursday — core inflation hit three-point-four percent, highest since October 2023. But I want to talk about something that doesn't show up in that headline number: what's happening inside your grocery store. Luna: Are we talking about prices still going up, or something else? Lucas: Both, actually. Prices are still rising — overall food-at-home inflation is running around two-point-eight percent year-over-year. But the really interesting story is that grocery store margins are expanding. That is, retailers are raising prices faster than their own costs are rising. Luna: So they're making more profit per item even while inflation is supposedly cooling? Lucas: Exactly. And there's a term for this: profit-push inflation. It's when companies use inflation as cover to widen margins. We saw it a bit in 2022 and 2023, but it faded as supply chains normalized. Now it's creeping back. Luna: What's changed? Supply chains are mostly fixed, right? Lucas: Mostly, yeah. Container shipping costs are down from pandemic peaks. Labor is still tight but wage growth is moderating. So input costs aren't surging. But look at the latest earnings from Kroger and Albertsons — both reported gross margins up about sixty to eighty basis points compared to a year ago. That's not cost-push. That's pricing power. Luna: So shoppers are paying more, but the extra isn't going to farmers or truck drivers — it's going to shareholders. Lucas: Right. And this is a problem for the Fed because their tools — interest rates — are designed to cool demand-driven inflation. If inflation is coming from profit margins, raising rates might not fix it. It could even backfire if higher rates make companies feel more pressure to protect margins. Luna: But isn't this just capitalism working? If consumers are willing to pay, why wouldn't stores charge more? Lucas: It's a fair question. And in a competitive market, you'd expect new entrants or discounters to undercut. But grocery is a thin-margin industry — typically two to three percent net profit. So even a small margin expansion has an outsized impact on profits. And the major chains have been consolidating. Kroger alone operates nearly two thousand eight hundred stores. There's less competitive pressure to pass savings along. Luna: So it's a structural issue, not just a temporary lag. Lucas: Exactly. And we can see it in the data. The Bureau of Labor Statistics publishes what they call 'gross margins for food retailers' as part of the producer price index. That measure has risen about two percent over the past year, even as wholesale food costs barely budged. The spread between what stores pay and what they charge is widening. Luna: That feels like something the CPI should capture better. But it's an average — some people see it, some don't. Lucas: And that's the thing. If you're a bargain shopper using discount stores or store brands, your inflation experience might be lower. But if you're buying national brands at a conventional supermarket, you're feeling the margin expansion directly. The CPI doesn't distinguish between those baskets very well. Luna: So what does this mean for the Fed? They can't exactly tell Kroger to stop raising prices. Lucas: They can't. But they can signal that they see it. Chair Powell has mentioned 'profit margins' in a few press conferences — not directly, but in the context of companies regaining pricing power. The concern is that if profit-push inflation becomes persistent, it could keep core inflation above the Fed's two percent target even as wage growth slows. Luna: And that would delay rate cuts. Lucas: Exactly. The fed funds rate is at three-point-six-three percent right now. Markets are pricing in a cut in September. But if core PCE stays at three-point-four or even three-point-five, they might hold. That would keep mortgage rates high and business borrowing costs elevated. So this grocery margin story is actually a macro story. Luna: How long do you think this margin expansion can last? Consumers have to push back eventually. Lucas: History suggests it's cyclical. In 2023, margins compressed as shoppers traded down to discounters like Aldi and Walmart. But right now, Walmart's margins are also up — they reported a thirty-basis-point expansion in their U.S. grocery segment last quarter. So even the low-price leader is benefiting. That suggests this might have another leg. Luna: So the big question is whether this is a new normal or just a lagged effect of past inflation. Lucas: Right. And I think the answer depends on competition. If we see more independent grocers or regional chains gain share, margins could compress. But if the big four — Walmart, Kroger, Costco, Albertsons — continue to dominate, they have the data and the pricing algorithms to optimize every shelf. That's tough to compete against. Luna: You know, talking about this — how companies use data to set prices — it reminds me of something. A handful of listeners actually help us keep this show going. We don't run ads, and that's intentional. The economics of running a daily podcast without ads is tricky. But some folks chip in monthly through buy me a coffee dot com slash fexingo, and honestly, that's what makes episodes like this possible. Lucas: Yeah, it's a small group, but it makes a huge difference. We get to focus on the stories that matter without worrying about sponsor pressure. So if you've gotten something out of our breakdowns, that's the way to support it. No pressure, just grateful. Luna: Exactly. Okay, back to grocery margins. One thing I want to dig into: is there any regulatory angle here? Like, could the FTC or DOJ look at this as a form of price gouging? Lucas: It's a live debate. In 2023, the FTC sued to block Kroger's merger with Albertsons, arguing it would reduce competition and lead to higher prices. That case is still ongoing. There's also been talk of state-level price gouging laws, but they're hard to enforce when margin expansion is gradual — you can't point to a single spike. Luna: So it's more of a slow burn. And the CPI might tick down but your grocery bill stays high. Lucas: Exactly. And that's the frustration a lot of people feel. The headline inflation number improves, but their lived experience doesn't. Part of that is rent and insurance, which we've covered. But part of it is this quiet margin recapture happening in everyday purchases. Luna: What should consumers do? Besides complaining. Lucas: I think the most effective thing is to vote with your feet — switch to store brands, use loyalty apps, shop at multiple stores. Kroger and Walmart both use personalized pricing through their apps, so they know exactly what you're willing to pay. The less predictable you are, the harder it is for them to extract that margin. Luna: So the algorithm is watching. Fight back with randomness. Lucas: That's actually not a bad strategy. And on the macro side, keep an eye on the next PCE release in late July. If core services inflation — which includes grocery margins indirectly — doesn't cool, the Fed will have a hard time cutting rates. That's the real policy takeaway here. Luna: Alright, I'm going to go buy some off-brand cereal just to confuse the algorithm. Lucas: Do it. And next episode, we'll look at how the housing market is defying the inflation slowdown — specifically, why home prices are rising again even with mortgage rates above six percent. Luna: Looking forward to it. Until then, keep your eyes on the spread.