Here's Minister Clark's release:
Latest annual food price figures released today confirm the need to rein in the super profits of the supermarket duopoly, Commerce and Consumer Affairs Minister David Clark said.
Today’s food price index figures show an annual increase of 7.6 percent in March 2022 compared to March 2021. This is the largest increase since the year ended July 2011 when prices increased 7.9 percent, partly influenced by the National Government increasing GST from 12.5% to 15%.
“The March increase is above general inflation figures and highlights the role the grocery sector is playing in driving up prices,” David Clark said.
“Rising food prices is a global issue. Omicron, ongoing disruptions to global supply chains and Russia’s invasion of Ukraine is putting pressure on prices in every country, but that is exacerbated here by the lack of competition at the checkout. And that is something we can act on.
“Today’s figures confirm the findings in the Commerce Commission’s grocery market study that the supermarket duopoly is making profits at the expense of everyday New Zealanders.
He goes on to note that he hasn't "ruled out going further than the options that the Commission tabled in its final report."
There are a few problems here.
First, rates of food price increases can't tell you much about the need for antitrust action, unless there's been some underlying change in the market structure.
In the standard linear model, a monopolist will pass through less of a cost increase to consumers. In that case, if food prices were rising more quickly than general inflation, the first-cut guess would be that they're passing through more of their cost increases than other sectors. That would be weak evidence against their being monopolistic, not evidence in favour of it. In other models, like with constant elasticity of substitution demand functions, it'll be indeterminate - the extent of pass through will depend on the elasticity that you pick. And again you can't jump from 'their rate of price increase is higher than other sectors' to 'they need antitrust'. You'd need to do more work.
If there'd just been a giant merger between the two supermarket chains and food prices started going up by a lot more than they had previously, and relative to other prices, then that would be worth looking into. It wouldn't at all be crazy to think that the change in market structure had done something. But where the market structure has been constant, it's going to be tough to blame it for changes in the rate of price increase.
Second, the March quarter CPI figures aren't even out yet. When Clark talks about general inflation figures, he's talking about December quarter 2021. He has to be, unless he's had early access as Stats Minister to the March quarter CPI figures - which is far far far less likely. And in that December 2021 quarter, the annual price increase in food was less than the annual price increase in CPI more generally - as had been the case in 70% of quarters over the past decade.
Some of the problem here comes down to inability to think through the difference between levels and rates.
Monopolies result in high levels of prices - higher than they should be. But that has no necessary effect on the rate of price increases. On a first cut you should expect monopolies to be less responsive to changes in costs than competitive players, but it's complicated.
It's true that improved competition in grocery retail and getting rid of government-imposed barriers to entry (zoning, consenting, overseas investment act) should reduce the level of grocery prices.
I'm not sure that anyone in the country has pushed harder than I have for liberalising land use planning, consenting, and the overseas investment act to enable more entry.
But doing so won't reduce inflation. It will cause a level shift downwards in the CPI relative to the counterfactual, and the path to that new and lower path for the CPI might take a little while. You'd then expect CPI growth to be lower than otherwise until you're at the new path, and CPI to resume its prior rate of price increase after that.
There's plenty of harms from the government-imposed barriers to entry that result in less competition than might be desirable. Higher overall prices are one. Clark's blaming the supermarkets for rising CPI is just wrong.
A snippet from the column:
Clark suggested that food prices rising ahead of the overall Consumer Price Index justifies anti-trust action in groceries.
Over the past decade, annualised food price inflation has been below overall consumer price inflation in 28 out of 40 quarters – 70 per cent of the past decade. Should we then ignore the Commerce Commission’s recommendation to liberalise zoning and land use planning so that more supermarkets can enter the market?
I hope not.
Even worse, Clark implicitly compared March quarter food price figures with December quarter CPI figures. March quarter inflation figures will not be released until later this week. It is currently impossible to say whether food price inflation is above or below the overall CPI.
The most recent inflation figures are from the December quarter. In that quarter, year-on-year food price inflation was 1.8 percentage points below the overall CPI.
So the Minister was wrong about the most recent possible comparison between food price inflation and overall inflation, and did not know or ignored the trend over the past decade.
It gets dumber still.
Suppose that New Zealand had a single monopoly grocer covering the entire market with no competition at all, instead of two chains with many fringe competitors.
That monopolist would be very profitable.
But would it use inflationary conditions as opportunity to hike prices even more? In other words, does inflation enable a monopolist to become even more greedy?
Not really. The standard case suggests the opposite.
Monopolists are generally bad for consumers. But a monopolist is generally less responsive to changes in costs.
The standard simple example taught in intermediate microeconomics texts has a monopolist passing through half of a cost increase to consumers rather than the full amount.
Monopolists charge too high a price to begin with, relative to a competitive market benchmark. Fully passing cost increases through to consumers would mean lower profits because of reductions in turnover.
That is why only 7 per cent of US economists surveyed in January, in response to similar populist nonsense there, agreed that market power is a significant factor in explaining inflation. Only 5 per cent agreed that antitrust interventions could successfully reduce inflation over the next year.
Harvard’s Eric Maskin provided the standard answer: “Theory suggests that monopolists respond less to changes in costs than pure competitors do, so market power doesn’t seem a likely culprit.”
So Clark was wrong in stating that food price increases have outstripped inflation. Inflation data for the most recent quarter has not even been released yet, and overall inflation in the December quarter ran hotter than food price inflation.
Even if he had been right about food price inflation exceeding CPI in the most recent quarter, he would have been wrong about the overall trend over the past decade.
And if food prices had outpaced inflation over the past decade, that would be weak evidence against the need for increased competition in grocery retail, not justification for greater intervention.
In short, the minister was wrong from beginning to end. Absolute economic ignorance would be the most charitable explanation, but even then he might have considered asking Treasury’s advice.
More plausibly, Clark was scapegoating the supermarkets to justify populist measures against them, or to deflect attention from his government’s failure to keep the Reserve Bank on target, or both.
We are going to get so much more stupidity fuelled by high inflation rates.
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