Today, Explained - Excuseflation

Episode Date: July 6, 2023

Inflation happens for a lot of reasons that can be hard for even economists to fully grasp. But — as we learned this spring in an episode we’re rerunning today — there’s also a more straightforward reason prices keep going up: greedy corporations are using inflation as an excuse to jack up prices. This episode was produced by Miles Bryan, edited by Matt Collette, fact-checked by Laura Bullard, engineered by Paul Robert Mounsey, and hosted by Noel King. Transcript at vox.com/todayexplained Support Today, Explained by making a financial contribution to Vox! bit.ly/givepodcasts Learn more about your ad choices. Visit podcastchoices.com/adchoices

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 panty is coming to a close, but prices are still very high.

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. Coming up on Today Explained, the gaming partner of the NBA, has your back all season long. From tip-off to the final buzzer, you're always taken care of with a sportsbook born in Vegas. That's a feeling you can only get with BetMGM. And no matter your team, your favorite player, or your style, there's something every NBA fan will love about BetMGM. Download the app today and discover why BetMGM is your basketball home for the season.

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If you have any questions or concerns about your gambling or someone close to you, please contact Connex Ontario at 1-866-531-2600 to speak to an advisor free of charge. BetMGM operates pursuant to an operating agreement with iGaming Ontario. 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.

Tell me what it means. 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.

And that sounds fair enough. 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. Can you give me an example of something that has been excuse-flated? 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. 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. 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. The wholesale price is now at a four-year low.

And yet the company isn't saying that it's going to start dropping its prices. 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. I mean, listen, you are an economics reporter. You see what's happening. You are still buying chicken wings. Why are you not furious?

Why have you not put your foot down? 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. 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, how to get the most out of customers. But this is a phenomenon that also is endemic in smaller and mid-sized businesses. And this baker in Chicago kind of laid it out for us. He said, whether it's 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 timing can be everything. 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 excuse-flated

everything. Shouldn't that be happening? So I think this is really the key thing about excuse flation and where it differs a little bit from greed flation. 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 execution is it allows companies to raise prices all at the same time and all together. 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 fair 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 and the prices are actually quite surprisingly stable. So 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. 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. 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, you know, 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 an 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. 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? know, make some noises about this. I think Lael Brenner, 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. 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. 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. 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. And so I think those are the things that are really driving this dynamic. Bloomberg's Tracy Alloway, co-host of Odd Lots, the podcast. Coming up next, how companies justify these price increases. You want to know what premiumization means? Like Wingstop, we'll deliver. Support for Today Explained comes from Ramp. Ramp is the corporate card and spend management software designed to help you save time and put money back in your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions

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Okay, moments ago, excuselation. Now, Jason Carrion, the business news director at the New York Times, recently identified another reason, gentrification. Not of a neighborhood, but of the whole economy. Jason, what? 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. And what that implies is that it caters

to higher income consumers and leaves poorer people underserved. Now, what corporate executives will call that is premiumization, which is a mouthful. 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. If you were to ask an executive, give me a one sentence definition for premiumization, what would they say? 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. Got it. OK, 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. 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. And I think once you start to think about premiumization, excusflation, or just look at, you know, the price

of things now versus three or four years ago, you start to see it everywhere. And, you know, one recent example that's pretty interesting, I think, is at AMC, the movie theater chain. Somehow, hot break feels good in a place like this. 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.

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? 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-WD-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. 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. 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 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. 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.

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 in 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. There was a really funny example recently. The CEO of Smucker, which owns MilkBone, he said that,

We've had some nice success on some of the premiumization in MilkBone, things like taking the biscuits and dipping them and stacking them. There's actually a, basically what looks like an Oreo for dogs. You know, 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. 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. Tuggy's Trader Joe's. I love it. I love it. I love it. 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.

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. 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. 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? 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. 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 four percent 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. 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. 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. What are the longer term consequences of this two track economy, do you think? Well, it just puts in pretty sharp relief

the inequality of it. And when you get inequality, what that could mean, 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. 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, you know, COVID-19, this is having effects that are difficult to predict. And it's kind of uncertain where we're going. Today's show was produced by Miles Bryan, who will pay a premium for, Miles, tell me. I will pay a premium for airline tickets that avoid layovers. I hate layovers.

It was edited by Matthew Collette, who will pay a premium for socks. So, Hanes, just know he's out there. It was engineered by City Kid, Paul Robert Mouncey, who will pay top dollar for great produce. 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. I'm Noelle King. It's Today Explained. Thank you.