It isn’t surprising that NDP leader Jagmeet Singh would argue food inflation is due to price gouging by grocery companies. His business is politics after all, not a truth-finding mission. What was surprising was the weak response of grocery CEOs before a parliamentary committee last month: they seemed ill-prepared to deal with the accusation they were profiting from high food inflation.

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Jack Mintz: Sorry, Mr. Singh: Inflation-adjust food profits and gouging disappears Back to video

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Singh backs his claim by citing a Dalhousie academic paper by Samantha Taylor and Sylvain Charlebois, who compared 2022’s first-half profit margins with the average of the previous five years. They estimated that Empire/Sobeys, Metro and Loblaw made almost an annualized $1 billion in excess gross profits, with almost 90 per cent belonging to Loblaw.

Because the five-year averages included some weak years, the paper also compared the 2022 numbers with the most profitable of the previous five years. Using that estimate, excess profitability drops to $260 million. Loblaw’s “profiteering” is estimated to be $1 million per day while the other two firms were actually negative. This led Singh to accuse Loblaw’s CEO Galen Weston of reaping high profits while Canadians struggle putting food on the table.

All this makes good politics, but Dalhousie’s analysis is deeply flawed. The reason? To compare book profits of different years with quite different inflation rates is a definite “no-no.” Canada’s food inflation averaged roughly two per cent per year from 2017 to 2021 but then jumped to almost 10 per cent in 2022.

To be compared across years, profits need to be adjusted for the effects of inflation. No doubt it reflects my age, but that’s one of the first things that comes to my mind when inflation surges. Back in the 1970s and 1980s, experts spent considerable time correcting book profits for inflation. Several countries still make that adjustment for corporate tax purposes, including Argentina, Chile and Mexico.

As I wrote in October, inflation-adjusted profits are typically less than book profits. I apologize for the technical discussion but it’s important. Three corrections are involved. First, book depreciation and amortization expenditures have to be re-stated to reflect replacement rather than historical asset prices. Second, the cost of goods sold is also revised upwards so that older products taken out of inventory are again valued according to replacement cost, not historical cost. Third, net interest expense is adjusted downwards to account for inflation eroding the purchasing power of unindexed bonds held by lenders. For most non-financial companies, making all three adjustments reduces book profits in net terms.

I was curious to see whether correcting for inflation might be the main source of rising grocery margins. Looking at Loblaw’s financial statements for its retail grocery business, pre-tax profit margins rose from roughly 3.1 cents for each dollar of 2019 sales to 4.8 per cent in 2019.

That may look like gouging but is it? I estimate that, with the average life of capital running at about 18 years, depreciation and amortization would have been almost $800 million higher in 2022 if measured with replacement rather than historical values. For its part, the cost of goods sold was underestimated by $300 million. And, after correcting for leverage ($500 million), pre-tax profits adjusted for inflation were $600 million less in 2022 than the numbers published. Thus, instead of the profit margin being 4.8 cents on a dollar of sales, it would only be 3.2 cents — a hefty difference.

Of course, 2019 profits should be corrected for inflation, too. Inflation was only two per cent but costs need to be counted in real terms. After the required adjustments, pre-tax profits were 2.7 cents on each dollar of food sales, not the 3.1 per cent before accounting for inflation. So Loblaw’s inflation-adjusted profit margin in 2022 rose 0.5 cents to 3.2 cents but far less than that estimated by the Dalhousie paper (about $200 million in food sales rather than $1 billion). The half-cent increase in Loblaw’s margin therefore explains only 1/20th of the 10 per cent increase in food prices in 2022. Price gouging is not the problem.

Last October, the Competition Bureau announced it would probe food prices — at a substantial cost both to itself and to the food industry. It’s like a similar investigation into gas prices over four decades ago. After thousands of pages of study, the Bureau came up with a big fat zero. I suspect that once the Bureau adjusts grocery profits for inflation “nothing to see here” will be the conclusion this time round, too. My estimates are crude and based only on publicly available data, but they suggest taxpayer dollars could be better spent on more important competition issues.

Besides, the explanation for high food prices is likely simple: over-zealous deficit spending accommodated by printing money both during and after the pandemic has been the real culprit behind today’s inflation, not just for food but for all consumer products.