The established media approach to rising food prices and the role of Canada’s grocery chains is to send a reporter out to a local supermarket and ask consumers what they think of the cost of food. The CBC is expert at this hardcore journalism. Last week, after Loblaw reported profits up 12 per cent through 2022, the investigative CBC crew tracked down shoppers outside a No Frills to come up with the requisite evidence. “Companies,” said one woman, “they have no heart. They always want to make the same amount or more.” Another woman said Loblaw was “extorting from people.”

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There are, of course, other journalism techniques. Jim Stanford, the former autoworkers’ union economist, is always ready to spread anti-corporate perspectives at his Centre for Future Work and in the media. He’s hot on the trail of the grocery industry with a jumble of graphs and rhetoric. “Food is an essential commodity: we all must eat,” Stanford said, suggesting that food is a right and not just a commercial business — and implying, maybe, that governments should move in and make the Canadian food industry as efficient as Canada’s health-care system.

Stanford attributes the 11 per cent increase in food prices to the “concentrated oligopolistic power” of Loblaw, Metro and Sobeys. How much power is that in reality? Stanford doesn’t really say, but the annual Canadian retail food market runs to about $100 billion. Stanford says the net profit margin in the industry is less than three per cent. If Stanford’s prescriptions were applied, the food chains would have to eliminate their profits and run billions in losses to get the consumer price increases down from 11 per cent — to save Canadians from a monetary problem known as inflation.

Which brings us to a third option for the media push to blame food inflation on Canada’s grocery chains. Over the past few months, more than a few in the media have turned to Bank of Canada governor Tiff Macklem and his colleagues to support the idea that Loblaw/Metro/Sobeys may well be responsible for soaring grocery prices.

The Bank, in other words, is feeding the shopper-on-the-street world view. Macklem raised the idea during an appearance before the Common’s finance committee last November. “We are currently seeing that companies are able to pass on price increases to consumers. When inflation is low and the economic situation is more normal, companies don’t want to raise their prices, because they are afraid that their customers will go shopping at other companies. The problem when inflation is high is that everyone sees that prices are going up, so companies are not afraid of losing customers.”

He has repeated this theme in various interviews and speeches. On Feb. 7 he told a conference: “When consumers think inflation will be high, businesses don’t worry as much that higher prices will scare off customers, so they are more inclined to raise them.”

Later in February, in another appearance before the finance committee, Macklem again pinned inflation trends at least in part on the backs of corporations. “When inflation is high and when people see prices of everything going up, it makes it easier for companies to raise their prices, because people can’t tell: Is this a generalized increase or is it just this company raising their price?”

Macklem’s comments have given commentators evidence for the idea that the behaviour of Loblaw and the grocery oligopolists are responsible for food inflation because they know consumers will not shop around.

Where did this little economic theory come from? Paul Beaudry, deputy governor of the Bank, provided a clue in a mid-February speech to the Alberta School of Business. He repeated the idea. When inflation is rising, it has an impact on consumer behaviour. “If people don’t believe they can find a better price by shopping around, firms have more leeway to increase markups, leading to distortions that make the economy less efficient and consumers worse off.” (See Nota Bene below.)

In the text of his speech, Beaudry provided a footnote for the inflation competition idea — a 1993 paper in an economic journal co-written by Roland Bénabou, a French economist now a professor at Princeton University. Titled “Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?,” the paper is a dense agglomeration of jargon and equations deployed in a complex modelling exercise. The model is speculative, preliminary, uncertain and focused narrowly on how consumers might behave when trying to price one product. It’s a hypothesis based on nothing that actually happened in the real world of business.

In 1992, Bénabou published a paper on the same theme exploring “how inflation affects efficiency and output in monopolistically competitive search markets.” But he has since moved on to play a role in the development of leftist approaches to economic policy and inequality. He was, for example, an editor of Understanding Poverty, a 2006 anti-capitalism book that featured the ideas of two other French-born economists, neo-Marxists Thomas Piketty and Emmanuel Saez, among others.

As far as I can tell, the Bank of Canada has provided no other evidence for this unproven leftist corporate behaviour theory that has now been adopted by the media as an explanation of how the grocery industry exploits inflation and consumers.

Is this what the Bank of Canada is all about today? Maybe Galen Weston Jr. could order up some economic research to try to find out.

Nota Bene: The Bank of Canada’s corporate inflation theory

Excerpt from a Feb. 16 speech by Paul Beaudry, deputy governor of the Bank of Canada, to the Alberta School of Business:

As more and more households and firms look backward and focus on recent high inflation numbers, those numbers can start to displace the inflation target as a focal point for peoples’ expectations. If people start to base their expectations for inflation on the high inflation numbers they’ve been seeing lately rather than on the two per cent inflation target, high inflation will become more persistent, volatile and self-perpetuating. Without a sufficiently strong policy response, a drift in expectations away from the Bank’s inflation target can open the door to inflation remaining high and volatile for a long period of time.

As Canadians know all too well, high and volatile inflation makes it difficult for everyone to plan how to spend and invest. For example, companies find it more difficult to make key decisions for growing their business when they don’t feel confident about what their costs will be in the years ahead. And financial planning for households is also much more challenging.

But the negative effects don’t stop there. Increased volatility in inflation can also be costly because it scrambles the signals from prices and makes it hard to judge whether a higher price represents a true change in costs or something else. This makes it difficult for firms and investors to allocate resources to their best uses. It can also impact consumer behaviour in ways that make the economy less efficient.

Let me break that last point down into steps.

Say inflation is stable, and for a particular good you notice a price increase that is far out of line with the rate of inflation. This leads you to shop around because you think you can find a better price elsewhere. However, when inflation becomes high and volatile, many prices in the economy start moving up together. Seeing a higher price may no longer prompt you to search for a better one because you may believe that all other prices have also increased. That’s a problem because comparison shopping encourages competition. If people don’t believe they can find a better price by shopping around, firms have more leeway to increase markups, leading to distortions that make the economy less efficient and consumers worse off.

Footnote: For a model-based demonstration of this mechanism in markets with sufficiently high search costs, see R. Bénabou and R. Gertner, “Search with Learning from Prices: Does Increased Inflationary Uncertainty Lead to Higher Markups?” Review of Economic Studies 60, no. 1 (January 1993): 69–93.