--:-- Noel King: Welcome to Today Explained. I'm Noel King.
--:-- [Discussion begins]
--:-- Noel King: This year, a really interesting new idea appeared in mainstream economics. The idea is that the inflation we've been struggling with is due to corporations realizing they can charge us more and we will pay, a new cause of inflation. Now, at this point, we've had a good understanding of what causes inflation. Too much money chasing too few goods is the Econ 101 explanation. And of course, when supply chains break down, as they did during the pandemic, that'll contribute too. But you may have felt recently that things are more expensive than they should be. That the crisis created by the pandemic is coming to a close, but prices are still very high.
--:-- Tracy Alloway: Hi Noel, I'm Tracy Alloway, co-host of the Odd Thoughts podcast over at Bloomberg, where myself and my co-host Joe Weisenthal talk about the most interesting stories in finance, markets, and the economy.
--:-- Noel King: Two econ writers recently dug into the question of whether old-fashioned inflation is the reason for all of the higher prices, or whether something else is going on. There seems to be a reluctance on the part of businesses to start to bring prices down.
--:-- Tracy Alloway: Coming up on Today Explained, the hidden drivers of inflation. Support for Today Explained comes from Adio. Adio is an AI-native customer relationship management platform that Adio says is built for the next era of companies.
--:-- Noel King: AI agents are getting pretty impressive. You might not even realize you're listening to one right now. We work 24-7 to resolve customer inquiries. No hold music, no canned answers, no frustration. Visit sierra.ai to learn more.
--:-- Noel King: My name is Tracy Alloway. I am the co-host of the Odd Thoughts podcast over at Bloomberg, where myself and my co-host Joe Weisenthal talk about the most interesting stories in finance, markets, and the economy. You recently identified a phenomenon or wrote about a phenomenon that you call excuseflation. It does not roll off the tongue, but it's an interesting idea.
--:-- Tracy Alloway: I think a lot of people at this point have heard about this idea that companies, you know, maybe they're taking advantage of the current environment in order to raise prices and really gouging their customers. And the thing about excuseflation is it's sort of grounded in truth. It's the idea that companies are using these once-in-a-lifetime disruptions. You know, think about the supply chain hiccups that we've had. The Port of Los Angeles is once again seeing bottlenecks. Think about the Ukraine-Russia war. Well, the conflict in Ukraine and the sanctions on Russia have led to another surge in the cost of oil and gas. And they're using those one-off disruptions as an excuse to raise prices.
--:-- Noel King: And that sounds fair enough. If, you know, companies, they have expenses, if their input costs go up, maybe it makes sense for them to pass some of those on to customers. But where it starts to become insidious is when they're raising prices so much that they're seeing their profits go up quite substantially as well.
--:-- Tracy Alloway: Can you give me an example of something that has been excuseflated?
--:-- Noel King: Sure. So one of my favorite examples, because, you know, I love these personally, but chicken wings. Let's talk about chicken wings and Wingstop.
--:-- Tracy Alloway: You want to order Wingstop? We just got all these groceries. Yeah, but we didn't get Wingstop. You know you want that sauce and toss Wingstop where flavor gets its wings. Wingstop is a very large purveyor of very delicious chicken wings. And what they've been saying on their earnings calls is that they have been raising their prices for their delicious chicken wings. And the reason they've been doing that is because the wholesale cost of your basic chicken wing went up quite a lot during the pandemic.
--:-- Noel King: Whether you're serving them up from the deep fryer or selling them raw, chicken wings are hard to come by right now. I've been raising my wing prices every week for the last five weeks. We had a lot of disruptions at various farms, chicken farms, with labor shortages and things like that. So it made sense that chicken wing prices went up and the company started passing those on to consumers. The issue now, though, is that we have seen a substantial drop in chicken wing prices. Good news for you just in time for football season. Chicken wing prices have now dropped to below their pre-pandemic levels. And yet the company isn't saying that it's going to start dropping its prices.
--:-- Tracy Alloway: What it's discovered, much like a lot of other businesses at the moment, is that actually this strategy of making up what you lose in sales volume with higher prices. So you're selling fewer products, but you're selling them at higher prices. It's a viable strategy in the current environment. And it's working for a lot of companies because profit margins are up. Wingstop is coming off a better than expected quarter for sales as diners embrace the company's new chicken sandwich. It also helps from a profit perspective that chicken wing prices have started to or they have flown lower.
--:-- Noel King: I am still buying chicken wings. Why are you not furious? Why have you not put your foot down?
--:-- Tracy Alloway: First of all, let me say that my personal price elasticity when it comes to chicken wings is probably infinite. I will pay whatever it takes to eat buffalo wings. Wingstop is listening.
--:-- Noel King: We spoke to the owner of a bakery over in Chicago. And, you know, I think there's a tendency when you think about things like greedflation or excuseflation, you think about these big corporations, these really sophisticated corporations that are, you know, formulating their pricing strategies and how to get the most out of customers. But this is a phenomenon that also is endemic in smaller and mid-sized businesses.
--:-- Tracy Alloway: And this baker in Chicago kind of laid it out for us. He said, "Whether it rye flour or bird flu that impacts eggs when it makes national news, just running a business, it's an opportunity to increase the prices without getting a whole bunch of complaining from the customers. It's not that we're out there price gouging, but, you know, timing can be everything."
--:-- Noel King: Shouldn't competition push prices down? I mean, if I'm a business owner, I'm going to let consumers know that I can get them stuff cheaper than the other guys who have excuseflated everything. Shouldn't that be happening?
--:-- Tracy Alloway: So I think this is really the key thing about excuseflation and where it differs a little bit from greedflation. If a company starts raising its prices just because it can, then in theory, according to the basic rules of capitalism and economics, someone should come in and undercut them and steal all their business away. But the thing about excuseflation is it allows companies to raise prices all at the same time and all together.
--:-- Noel King: So the economist Isabella Weber, she basically says what it does is it gives companies de facto monopoly power. If we are in a situation where we have very highly concentrated corporate structures, which I think is a fairly clear description of large parts of the American economy, then we can actually see that the price response to demand is surprisingly small in many cases. The prices are actually quite surprisingly stable.
--:-- Tracy Alloway: You think about the reason that we tend not to like monopolies as consumers. We want, you know, a vibrant landscape of lots of smaller businesses that are all competing with each other so that we get a better value for our money. What happens when you have an industry-wide event that gives a group of businesses an excuse to raise prices is that they are all effectively, not officially, but effectively acting as a monopoly. They can all say, well, you know, it's bird flu, so we're all going to raise the prices of our eggs.
--:-- Noel King: Or when it comes to specific company examples, you know, Pepsi has been pushing their prices higher for a while. And you would think that, well, customers can just buy Coke instead. But actually, Coke is pretty much doing the same thing. And so you end up having these industries who are all acting together. And that means that there's very little incentive for them to start lowering prices because they're not seeing that competitive pressure.
--:-- Tracy Alloway: We tend to think of monopoly power as this, you know, kind of static thing. So, you know, you might have one big company that dominates an industry and that's a classic monopoly. Consumers don't have a lot of other options. But in fact, monopoly power can be a fluid and temporary thing. So when you see a supply bottleneck or when you see an industry-wide disruption, it can lead to the situation where companies all start acting very similarly. They all start doing the same thing. It's almost... I hesitate to use these words because they have legal connotations, but it's almost like a de facto cartel. Right, everyone decides to raise their prices all at once because whatever crucial component or input cost is going up. And so that leads to a automatic monopoly. It feels the same to a consumer who finds that actually they don't have a lot of options because one group of businesses is raising their prices all together, all at the same time.
--:-- Noel King: The Federal Reserve has been raising interest rates to try and slow inflation down. It's paused for the moment, but I wonder, does the Fed take corporate profits into account? If this is a new set of circumstances causing inflation, does the Fed need a new response?
--:-- Tracy Alloway: I think it would be really, really hard for the Fed with its current mandate to take something like corporate profits into account. We have seen policymakers, you know, make some noises about this. I think Lael Brennard, for instance, before she left to go to the National Economic Council, was talking about how it seems like there is this sort of inelastic component of consumer demand that maybe companies are taking advantage of.
--:-- Noel King: But what I would point to is there are other types of policymakers who are starting to cast a much more critical eye on this type of activity. You know, for instance, we're talking about supply-side disruptions. There is a lot of legislation that has come out of the Biden administration that is targeted at precisely these types of choke points.
--:-- Tracy Alloway: After weeks of negotiation and working with my team and with the major union retailers and freight movers, the ports of Los Angeles, the port of Los Angeles announced today that it's going to begin operating 24 hours a day, seven days a week.
--:-- Noel King: The second thing we know is that throughout the pandemic and the ensuing years, the rich have gotten richer and the poor have gotten poorer. They've blown through their savings while wealthier people have tended to see their savings just go up. So you almost have, you know, well, you do have two different classes of people here. You have one class of people that is probably feeling the pressure of higher inflation. They're not going to be buying as many chicken wings. But you have other people who, you know, they will stomach and possibly not even notice a 10 or 20 percent increase in the price of their chicken wings.
--:-- Tracy Alloway: And so I think those are the things that are really driving this dynamic.
--:-- Noel King: Bloomberg's Tracy Alloway, co-host of Odd Lots, the podcast. Coming up next, how companies justify these price increases.
--:-- [Support for Today Explained]
--:-- Noel King: You want to know what premiumization means? Like Wingstop, we'll deliver.
--:-- Jason Carrion: Hi Noel, I'm Jason Carrion, the business news director at The New York Times.
--:-- Noel King: Jason, what?
--:-- Jason Carrion: My co-author and I, we thought of gentrification as like an understandable metaphor for what companies are doing now in that they're prodding consumers towards fancier, often pricier versions of their products. And so as those products grow more exclusive and expensive, we thought of gentrification as that metaphor, as if it was the entire economy being gentrified.
--:-- Noel King: And what corporate executives will call that is premiumization, which is a mouthful.
--:-- Jason Carrion: There's probably two big drivers, I think, that have driven this premiumization over the last two decades and why I'm very bullish that premiumization will continue. And that's been coming up more and more when we talk to CEOs and CFOs and those types. And also, if you listen in on earnings calls, these calls that companies have with investors and analysts every quarter, it's fair to say that premiumization is a pretty popular buzzword right now.
--:-- Noel King: If you were to ask an executive, give me a one sentence definition for premiumization, what would they say?
--:-- Jason Carrion: Well, they would say that it's increasing the value of a product to a consumer beyond what it costs. So, you know, it's like adding new features, having some sort of branding that makes it more desirable in some ways. And that's several sentences. But really, it's they talk about value beyond just price.
--:-- Noel King: Okay, so earlier in the show, we were talking to Tracy Alloway about excuseflation. And this is where companies will jack up the price for reasons that don't have to do with input costs. But in this case, companies are jacking up the prices and saying higher quality is what justifies the increase.
--:-- Jason Carrion: Can you give me like a really specific example of where you have seen this happening? How much time do we have here? Because it's happening everywhere.
--:-- Noel King: And, you know, one recent example that's pretty interesting, I think, is at AMC, the movie theater chain.
--:-- Jason Carrion: They started raising prices for, you know, middle seats. The plan is to offer three tiers of seating. Preferred tier seats in the middle of the theater will be the most expensive, followed by standard, the most common choice, which the company says will remain the price of a traditional ticket. If you're in the mood for a bargain and don't mind a slight neck cramp, try Value, located in the front rows.
--:-- Noel King: The thing that really convinced us that it was time to write this story about this phenomenon was when we saw executives at WD-40 mention premiumization. And what did they say?
--:-- Jason Carrion: You know, WD-40, the lubricant that you use to fix squeaky wheels, hinges, doors, all that sort of thing. WD-40, WD-40. WD-40, pick up a can at your favorite store. Try it. WD-40. They have been talking about premiumization as part of their strategy and what's driving profits there. And that's not something, you know, you generally consider as like a luxury good. But they have, you know, cans of lubricant now with what they call a smart straw. Flip it up for a precision stream. This will get to those hard to reach places. Flip that straw back down for regular spray action. And they also have something called easy reach, which means that you can shoot WD-40 around corners. And the best part, the straw is right where I left it.
--:-- Noel King: And what that means is that they can charge more for each bottle of lubricant. They say that it's because, you know, hey, these shoot two different ways. And so that's worth, you know, an extra quarter or 50 cents or something on a bottle.
--:-- Jason Carrion: And so once you apply that to other products, you start to see it just about everywhere. I think you also wrote, and this is very near and dear to my heart, about pet food. I think pet food is a fascinating example of this because pet food has been premiumizing, to coin a term there, for many, many years. So that trend has been kind of turbocharged by the pandemic.
--:-- Noel King: So what's happening with pet food is that executives in that industry have been talking about the humanization of pet ownership for a while. You know we treat our dogs cats and other pets as akin to human members of our families and we spend more and more on fancier things for them and that mainly involves food and so that humanization trend has run into the kind of pandemic boom and pet ownership has run into the splurge and spending that we saw during the pandemic when people got stimulus checks when they were at home and other expenses went down and they decided to spend more on their households, and that includes pets.
--:-- Jason Carrion: There was a really funny example recently. The CEO of Smucker, which owns Milk Bone, he said that we've had some nice success on some of the premiumization in Milk Bone. Things like taking the biscuits and dipping them and stacking them. There's actually basically what looks like an Oreo for dogs.
--:-- Noel King: Pets don't necessarily eat more than they used to, but we're spending way, way more on pet food than we used to. And that is a part of this long-running premiumization trend that has only gotten deeper over the past three years.
--:-- Jason Carrion: I got a pandemic puppy. I love him so much. I started out feeding him kibble and then he was kind of like turning his nose up at it. So I started buying him the expensive crap, Fresh Pet. And then in the last month he started turning his nose up at fresh pet, and now I have to give him freaking human food. He has premiumized me up to Trader Joe's. I'm so pissed. Dougie's Trader Joe's. I love it.
--:-- Noel King: I think there's ways in which this could seem niche, right? It's like Noel and a couple thousand other idiots will pay for expensive dog food. But, you know, it's not all through the economy.
--:-- Jason Carrion: Is premiumization playing into these big, broad inflation numbers that we have out this morning? It could be. It's kind of hard to identify in the big macro stats. But if you talk to any economists, market watchers, analysts, those types, you're starting to hear them talk more and more about profit-led inflation.
--:-- Noel King: So inflation has been on a bumpy but steadily downward slope in recent months. And it's been maybe a little stickier than people thought, given that energy prices have come way down and some of those big spikes we saw earlier in the pandemic have moderated. And what's left is profits, is companies' profit margins. And so some of the inflation that we see now, and some people have tried to put a number on it, but a not insignificant amount of it is down to companies just keeping prices high, quite simply.
--:-- Jason Carrion: In this kind of dynamic, in this kind of environment, what happens? What does this mean for lower-income people who can't afford gentrified WD-40?
--:-- Noel King: What it does mean is that there's a real risk that lower-income households are underserved in this new type of economy. And that just puts into even sharper relief the inequality that we've seen for quite some time in most Western economies.
--:-- Jason Carrion: And the car market is a really good example of this. We ran some numbers on it. We talked to some people. At the end of 2017, there were almost 30 different new car models that you could buy below $25,000. The share of cars that cost that much or less, so kind of like lower-end new cars, were more than 10% of all sales of cars. Now, there are only about 10 models that cost $25,000 or less. And the share of sales of those cars is like 4%. It's tiny. Car sales have been pretty robust lately, some pretty perky numbers out there. But there are a big swath of people out there who are being completely priced out of the new car market. And that then filters down to the used car market. And so prices will go up there also.
--:-- Noel King: And then just generally, you start to picture this economy that is potentially a little bit more unequal than it has been. And it's already pretty unequal.
--:-- Jason Carrion: And you get a vision of an economy that has lower production, potentially higher inflation, and then over the longer term, just a permanently higher prices for essentials and luxuries and just about everything.
--:-- Noel King: What are the longer-term consequences of this two-track economy, do you think?
--:-- Jason Carrion: Well, it just puts in pretty sharp relief the inequality of it. And, you know, when you get inequality, what that could mean, you know, macroeconomically speaking, is less stability for the economic system, but also for just society as a whole. And that feeds into politics and sort of other things.
--:-- Noel King: And so it's not necessarily a bright picture for the economy, but like so much else in this post-pandemic economy, it's confusing. And that's what we've heard from lots of different economists, too. They're seeing this. Can this continue? Are there stability concerns with this? What does it mean for inequality? What does it mean for our politics in the future? And a lot of them, honestly, just kind of throw their hands up because like so much else, since we learned of COVID-19, this is having effects that are difficult to predict. And it's kind of uncertain where we're going.
--:-- [Support for Today Explained]
--:-- Noel King: Today's show was produced by Miles Bryan, who will pay a premium for... Miles, tell me.
--:-- Miles Bryan: I will pay a premium for airline tickets that avoid layovers. I hate layovers.
--:-- Noel King: It was edited by Matthew Collette, who will pay a premium for socks. So, Haynes, just know he's out there.
--:-- Matthew Collette: I will pay a premium for socks.
--:-- Noel King: It was engineered by City Kid Paul Robert Mounsey, who will pay top dollar for great produce.
--:-- Paul Robert Mounsey: I will pay top dollar for great produce.
--:-- Noel King: And it was fact-checked by Laura Bullard who, believe it or not, but you should believe it because she's a fact-checker, will pay a premium for that special WD-40 that can shoot around corners.
--:-- Laura Bullard: I will pay a premium for that special WD-40 that can shoot around corners.
--:-- Noel King: I'm Noelle King. It's Today Explained. Thank you.
