The Federal Reserve has gotten a lot of flack from critics who claim that its efforts to boost the economy has caused prices to rise, and could lead to massive inflation. But a new study suggests that at least some of the nation’s rise in food prices is not the fault of the Fed. It’s Costco.
The bulk retailer, which generally charges as much as 45% less than other stores, seems like an odd target to pin inflation. But a study published this week by the National Bureau of Economic Research found the opening of a Costco tended to drive up grocery prices in the surrounding area. The Costco inflation effect is particularly surprising because it is the opposite of Walmart, which generally causes competing stores to lower their prices.
The study, which is titled Competing with Costco and Sam’s Club: Wharehouse Club Entry and Grocery Prices, looked at what effect the opening of a Costco had on grocery prices in nearby supermarkets. The authors found that on average customers who continued to shop at the supermarkets near a Costco tended to spend 3% more on groceries than they did before the bulk retailer opened. The Costco Inflation effect was generally larger in smaller towns.
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Charles Courtemanche, a co-author of the study and an economics professor at the University of Louisville, says he was surprised by the outcome. Why does it happen? One theory could be that nearby supermarkets try to compete with Costco by widening their variety and adding more upscale, and pricey items, to their shelves. As a result, the average grocery bill goes up. But Courtemanche says that may not be the case. In the study, he and his co-author, Art Carden of Rhodes College, looked at total grocery bills, as well as tracked individual items. Both went up, though the data on the later wasn’t detailed enough to rule out theory that people had gone upscale. Instead, Courtemanche says he thinks Costco tends to drive the cost conscience customers out of the local supermarkets. The remaining customers are willing to pay more. Store managers figure that out and raise prices. But that theory doesn’t explain why Costco would be driving up prices, while Walmart has the opposite effect. Another reason could be that people are willing to pay up for convenience. Corner stores in New York City have long charged more than supermarkets. And that’s what those local supermarkets become when a Costco opens nearby. For one or two items, that you don’t need to have in bulk, a trip to Costco doesn’t make a lot of sense.
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Whatever the reason, the larger point for our current economic debate is that it is very hard to pinpoint the source of inflation. Shopping habits and new stores, at a time when overall inflation is rising just 1.2%, can have a significant impact on prices. The Fed has recently debated whether to launch a new round of bond-buying stimulus efforts. Many have said the Fed would be wrong to do so because of its effect on prices. But who knows what the Fed’s effect on prices has been. Gas and food prices did rise after the Fed’s most recent round of stimulus, dubbed QE2, which ended last month. But was that a result of the Fed or the Arab Spring or even Costco? The point is we really don’t know. And until we do, and until the economy fully recovers, which it looks to be farther from doing recently, no stimulus measure should be taken off the table.