Have you noticed that grocery prices have risen? Some of my friends have mentioned it, and yesterday I think I saw some prices that are higher now than they were a month ago.
If prices are higher now, are rising, and are expected to continue to rise for the next few months or longer, here are some possible explanations:
I. Microeconomics
Costs are rising:
- Many grocery chains and other retailers have given their employees raises of 10% or more
- Many grocery stores have put down tape or spray painted markers 6' apart inside and outside their store to promote distancing; they have also put up queue-control barriers to keep people distancing in the queues instead of crowding near the front; doing this is not cost-free.
- Many grocery stores have someone at the door to limit the number of people in the store at any given time.
- They also have people wipe down the handles of the baskets, carts, trolleys, etc.
- Some even have sanitizer stations for people to sanitize their hands.
- Restocking shelves isn't cost-free either, and since people are staying at home and eating at home more now, this means they're also buying more at grocery stores rather than at restaurants, hotels, trains, planes, etc. How does this add to costs/unit? see the next item.
- Diminishing marginal product: you can add more product and you can hire more employees (maybe), but it's hard to add more space in the store and in the back storage areas. More people and more product means more congestion and more congestion costs. Also, hiring more workers means digging deeper into the pool of potential workers, and retraining current employees is also costly
- Higher demand typically means stores just try to order more from their suppliers, but there are higher costs for suppliers, too, as they face shortages and rising costs of their own.
- Given that the value of the Canuck buck has declined relative to the US dollar, that means Canadian importers are paying more for everything that might end up on the shelves or might be used to produce things that might end up on the shelves.
Demand is rising:
- As I noted above, people are buying more from grocery stores than they used to.
- As some managers and some suppliers see the increased demand, they raise the prices. Often not in any major or obvious way. Pricing decisions are not simple textbook [find the q/t for which MR=MC] but rather involve considerable trial and error, either at the store or at some regional or head office.
- When people have to queue up to get into stores, and when people read or hear about stores being out of some things, they don't worry so much about paying a few cents more for many of the items on their shopping list. [in econ-speak, the price elasticity of demand is lower in those instances]
- Some stores have fewer sales, and some stores no longer put out flyers advertising sales.
II. Macroeconomics
Aggregate Supply
- The CoVid-19 pandemic has caused a decline in the overall rate of production. Many (probably most) manufacturing facilities are still trying to operate full time, but they are facing increased supply problems for some items, in part due to transportation issues and in part due to bottlenecks.
- The lock-down, quarantine, and isolation policies have primarily affected the service sector of the world economy, but not exclusively. Also, the drop in production of services has led to a major shift to the left of the overall Aggregate Supply curve.
Aggregate Demand
- One would think that with so many people's incomes dropping, Aggregate Demand would decline. However...
- In both Canada and the United States, numerous policies have been implemented to dampen the effect of the pandemic on people's incomes. This is especially important if (1) people expect the support policies to be reasonably lucrative, (2) people expect to be supported if they over-extend, and/or (3) they expect it all to be over in a couple of months or so. Following the Friedman permanent-income-hypothesis, if people consume according to expected income (including gubmnt programmes), consumption may not drop much at the aggregate level.
- What is there to spend money on? People who regularly (or even irregularly) traveled, ate in restaurants, shopped a lot in person, etc. all have less to shop for. They (we) are driving up demand for the things we can still buy.
- Over the next year or so, the gubmnts plan to increase their fiscal deficits astronomically. These deficits will almost surely be monetized to a great extent by the central banks. [in colloquial language, the gubmnt won't raise taxes to pay for all the programmes; instead it will print more money]. The increased money supply will lead to much more rapid inflation over the the next two years unless the central banks try to neutralize that effect. They've shown no indication they intend to so so.
Sectoral Shifts in Demand
- As consumers try to buy more household products in general, manufacturers cannot instantaneously hire and train more employees the products that consumers want more of. As I once wrote (albeit in reverse) back in the late 1970s, "you can't easily transport and train all the workers in the oil patch to some place where they can produce more surgical masks, toilet paper, etc.