Once again, food retailers are defending their profits, blaming world events: supply chain increases the weather and so on. But they may be hiding behind the principle of compounding increases. Which means they’re technically right. But…
Food prices increase based on the principle of compounding, not because
retailers increase their profit margins during already-hard times…
Trying to understand food prices
We’ve heard it before. Supermarket execs say their profit margins aren’t growing. ‘Greedflation’ is an illusion.
But at the same time, food prices are growing month over month. I, for one, have had a hard time understanding how both those statements can be true. But testimony by Loblaw’s, Metro and Empire Holdings execs before a special parliamentary committee this week have finally cleared the steam from my glasses.
Numbers don’t lie
But our brains sometimes do. Let’s start with the basic numbers. The CEOs say their profit margins have wavered slightly, between 4 and 6 percent, over the past few months. Economists say food prices continue to increase, some at record rates. How?
Loblaw’s head honcho Galen Weston just grinned and repeated what lower-level Loblaw’s and other supermarket execs had already told the government committee earlier. He even used the word ‘impossible’ to describe allegations that the food retailers are indulging in ‘greedflation’, fleecing customers.
Turns out a lot of folks who aren’t economists or accountants haven’t caught on to the phenomenon that really is at work.
Increases on top of increases
The execs say small increases in product and commodity prices are driven by all the influences an pressures industry apologists always fall back on when asked to explain food prices. The main causes of higher food prices remain higher fertilizer costs, higher transportation costs and unpredictable weather in southern growing regions.
When food retailers’ profits are applied to those, you get a certain absolute increase in retail prices. Then along comes the next month, when supply chain costs increase a little more and the retailers apply their usual profit margins to the total of increases to the previous month’s retail prices – producing a new inflated price.
The mathematicians say its because we’re multiplying last month’s percentage increase by a percentage. It’s a compounding effect. What banks used to call ‘the miracle of compound interest’
The food retailers don’t have to increase their profit margins at all to enjoy increased overall profits every year. All they have to do is sit back and let the ‘miracle’ of compounding work its shady and inevitable black magic.
If you think you understand the effects of compounding well enough to suggest a equitable way to stop the compound inflation it causes, please write immediately to the Office of the Prime Minister, Parliament Hill, Ottawa, Ontario. The postage is free.
~ Maggie J.