If Grocer Profits Rose About 1.5% Is that Evidence of "Price Gouging" at the Grocery Store?

Some people seem to believe that grocery prices exhibited evidence of price gouging because of the Covid pandemic. 

Price gouging represents what people consider “unfairly high” or “excessive” increases of the prices of goods, services, or commodities in relation to the normal market price or the cost of providing those goods or services. 

Such potential behavior typically occurs during emergencies or periods of market disruption when buyers have limited choices and are considered vulnerable. And the key is the notion of “unfair” or “excessive” increases. 

Economists always predict price hikes when supply is constricted or demand inflates, especially unexpectedly.   

Studies do show an increase in profit rates during the Covid supply chain problems, but some of us would also note that supply and demand also could explain all the increases. 

There arguably was more demand for groceries as consumers were confined to their homes and restaurants were shuttered for “on premises” dining. Supply chain disruptions caused shortages--and shortages tend to create price pressures. 

With plants shuttered and workers at home, production dropped. Transportation networks also faced slowdowns and materials shortages which, in turn, cascaded through the rest of the value chain. Measures to protect workers also slowed productivity, since time, cost and effort had to be shifted to “sanitizing” premises rather than producing. 

One Federal Trade Commission report suggests grocery retailer profit margins rose from about 5.6 percent to as much as seven percent.  

Other studies suggest profit increases because of Covid on the order of about 1.5 percent between 2019 and 2020, with margins declining afterwards. 

“Demand for many retail grocery products unexpectedly spiked upward during the pandemic, just as the supply chain was struggling with a series of input, labor, and transportation challenges,” the FTC report notes. 

Shipping demand increased while supply decreased, for example. 

The point is that one need not assume any “price gouging” to explain temporary profit increases at a time when demand grows and supply decreases. That basic dynamic would lead to higher prices, and often higher profits in any market similarly affected. 

Event	Good/Service	Imbalance Type	Key Consequence(s)
2020-2023 COVID-19 Pandemic	Toilet paper, hand sanitizer, computer chips, lumber	Excess demand, supply chain disruptions	Shortages, delayed construction projects
1970s Oil Crisis	Gasoline	Inadequate supply	Long lines at gas stations, fuel rationing, higher energy costs
2011 Japanese Earthquake and Tsunami	Semiconductor chips, automobiles	Supply chain disruptions	Production delays, higher prices for electronics and cars
Hurricane Katrina (2005)	Gasoline, food, building materials	Excess demand, supply chain disruptions	Shortages, price increases, delays in rebuilding efforts
2022 Russian Invasion of Ukraine	Wheat, sunflower oil, natural gas	Inadequate supply	Global food price inflation, energy crisis in Europe

And while there is no automatic and linear relationship between prices and profits, imbalances in supply or demand (less supply; more demand) almost always lead to higher prices. And temporary supply-demand imbalances arguably often lead to temporary profit gains. 

Situation	Demand	Supply	Price	Impact on Supplier Profits
Shortage of Housing	High demand for housing in desirable areas with limited construction	Limited supply of available homes	Increased home prices and rents	Increased profits for landlords, home sellers, and real estate developers
Concert Ticket Scarcity	High demand for tickets to a popular concert or event	Limited number of tickets available	Increased ticket prices, potential for scalping	Increased profits for the concert organizers, artists, and potentially scalpers
Collectible Item Craze	Sudden surge in demand for a rare collectible item (e.g., limited-edition sneakers, rare trading cards)	Limited supply of the collectible item	Significantly increased prices	Increased profits for collectors who already own the item and resellers
Natural Disaster Disruption	Increased demand for essential goods (e.g., batteries, flashlights, bottled water) after a natural disaster	Limited supply due to transportation disruptions and supply chain issues	Increased prices for essential goods	Increased profits for suppliers who can still provide essential goods, potentially even with unethical price gauging
Technological Innovation	High demand for a new, innovative tech product (e.g., a revolutionary smartphone)	Limited initial production capacity due to manufacturing constraints	High initial prices and potential for waiting lists	Increased profits for the tech company, despite potentially limited initial supply