Watchdog report praises FDA for diverting restaurant food to grocery stores

A report released this week by the government’s internal watchdog praised the Food and Drug Administration (FDA) for allowing food that was meant for restaurants to be stacked instead on grocery store shelves as inflation following the pandemic hit 40-year highs.

Inflation has been coming down throughout the economy, as Friday’s personal consumption expenditures (PCE) price index dropped to 5 percent annually in February from 5.4 percent in January.

But food prices are bucking this trend and remaining excessively high.

The latest consumer price index (CPI) put groceries at 10.2 percent more expensive than they were last year. That’s compared to 6 percent annual inflation across the economy as a whole.

The new report from the Government Accountability Office (GAO) said that the FDA helped to alleviate some of these soaring prices by making changes to their regulations.

“By relaxing regulations to let food made for restaurants be diverted to grocery stores, the FDA helped to avert food shortages that could’ve further increased prices during the COVID-19 pandemic,” the report found.

“From 2021-22, U.S. retail food prices rose by 11 percent — the largest annual increase in over 40 years. Rising food prices particularly impact low-income consumers, who spend about 30 percent of their income on food. Many factors influencing the food supply chain can affect retail food prices, such as global trade issues, pandemics, animal and plant disease outbreaks, and war,” the report said.

The report also noted the spike in food prices that followed the outbreak of war between Russia and Ukraine.

The component costs that go into determining the prices of goods and services fall into the three main categories of input costs, labor costs and profits.

While the labor share of pricing has fallen over course of the pandemic, the profit share of pricing has risen, Commerce Department data shows. 

Unit labor costs have fallen from about 60 percent to 58 of prices since the beginning of 2020, while profit margins have increased from around 12 percent to 15 percent, according to calculations by The Hill.

This has led some economists to term the current inflation a “sellers inflation,” meaning that it originates with profit margins as opposed to labor costs. That’s different from the high inflation that hit the economy in the 1970s, which is widely agreed to have been related to a wage-price spiral.

There are long-term tailwinds to this trend, which show that markups and profits have been rising for decades.

“In 1980, aggregate markups start to rise from 21 percent above marginal cost to 61 percent now,” economist Jan De Loecker and others wrote in an influential 2020 study for the Quarterly Journal of Economics. “We also find an increase in the average profit rate from 1 percent to 8 percent.”

A 2020 paper by Simcha Barkai of the London Business School produced a similar long-term result. 

“A large increase in the share of pure profits offsets declines in the shares of both labor and capital Industry data show that increases in concentration are associated with declines in the labor share,” Barkai wrote in his paper.

Some food producers have recently been accused of price gouging. Mississippi-based egg producer Cal-Maine recently saw its profits leap by more than 700 percent, as egg prices have soared to record levels

Many commentators have noted that supply chain disruptions during the pandemic have given cover to private firms that are incentivized by the market to raise their prices as much as they can.

Almost all government agencies adjusted their regulatory practices in response to the coronavirus pandemic, and these changes are being assessed at various levels of government.