[THE VIEW]Why Are Grocery Prices Low in the United States?

High Average Income Keeps Engel's Coefficient Low
Lower Production Costs for Agricultural and Fishery Products
Debate Over Banning Grocery Price Gouging Is Inappropriate

Kamala Harris, the Vice President of the United States and the Democratic Party's next presidential candidate, recently proposed measures to prohibit excessive grocery price gouging. This is because Americans have continued to express deep concerns about grocery prices since the COVID-19 pandemic. Grocery prices in the U.S. rose by as much as 25% between 2019 and 2023. Fortunately, grocery price inflation has significantly slowed down in 2024, but prices remain higher than pre-pandemic levels.

From an economic perspective, is a measure to prohibit grocery price gouging a reasonable regulation? Before asking that question, it is necessary to determine whether price gouging is actually occurring in the U.S. grocery market. However, direct evidence of price gouging in U.S. groceries is hard to find. The term "price gouging" is generally used when the prices of essential goods rise abnormally after a sudden change in supply or demand. Since the concept of price gouging itself is difficult to define empirically, it is also challenging to present empirical evidence. Although several U.S. states have laws prohibiting price gouging, enforcing these laws is not easy.

The profit margins in the U.S. grocery industry have traditionally been very low, generally maintaining a low margin of about 1-2%. Additionally, U.S. grocery prices have remained relatively among the cheapest in the world. This is evident when looking at the ratio of grocery spending to disposable income or the share of food in total household expenditure (Engel's coefficient). For example, according to data from the U.S. Department of Agriculture (USDA), last year Americans spent about 11.2% of their disposable income on groceries, which is the same ratio as in 2022.

Internationally, the U.S. grocery spending ratio is very low. According to USDA comparative data, as of 2022, the U.S. had the lowest Engel's coefficient compared to any other country. In South Korea, for instance, about 15% or more of disposable income was spent on groceries in 2022. In several low-income countries (such as Bangladesh, Myanmar, Ethiopia, etc.), the Engel's coefficient is 2 to 4 times higher than that of the U.S. Even when compared to middle-income countries like Argentina, Brazil, China, Costa Rica, and Mexico, the U.S. maintains a considerably lower level.

There are two main reasons for this. According to Engel's law in economics, as household income increases, the proportion of total consumption expenditure spent on food decreases. Since the U.S. has a high average income, a low Engel's coefficient is natural. Another reason is the low grocery prices. Agricultural and fishery products in the U.S. are produced in such large quantities that economies of scale reduce production costs. Lower costs lead to lower prices.

Currently, it is difficult to say that price gouging is occurring in the U.S. grocery market. Therefore, discussions about prohibiting price gouging are not timely. Relatively affordable grocery prices remain one of the U.S.'s strengths compared to other countries. Most countries would envy the current grocery price situation in the U.S. Despite rising prices, the U.S. can still offer relatively affordable groceries, which is an economic reality many countries aspire to.

Seo Boyoung, Professor at Indiana State University, USA