Today, Explained - Why stuff is getting more expensive

Episode Date: June 23, 2021

Vox’s Emily Stewart explains how scared you should be of inflation. 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

Get groceries delivered across the GTA from Real Canadian Superstore with PC Express. Shop online for super prices and super savings. Try it today and get up to $75 in PC Optimum Points. Visit Superstore.ca to get started. The United States of America is all about getting back to business as usual. There's just one thing getting in the way. Well, actually, there's a few. There's the coronavirus, which just continues to nag. All right, following that breaking news,

let's break in here with Chris Paul entering the NBA's COVID-19 health and safety protocols. We're wishing CB3 a speedy recovery. Then there's the labor shortage, which we've talked about in the show before. And then there's this other big thing. Prices for all sorts of stuff are going kind of haywire. The price of everyday groceries going up. Everything from coffee to cereal to wine, up.

And if you haven't filled up in a while, get ready for some pain at the pump. Gas prices are way up. 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. And all those surging prices, coupled with some serious supply issues, have some economists worried about that I-word. Right now, inflation is rising faster than it has since about 2008. And we've really only seen a handful of periods of inflation at these levels since the early 80s. Emily Stewart is a senior reporter at Vox. Like me, she was around in the 80s, but wasn't particularly

bothered by inflation at the time. So the economy is running a little bit hot right now, and you're seeing that in all sorts of places. To back up a little bit, what inflation is, is it's a general rise in prices. So let's say you go to the grocery store, your basket of goods used to cost $20, suddenly it costs $23. And the idea here is that we don't want inflation to get so out of control that your money doesn't go as far as it used to. In an ideal world, your wages go up with inflation, right? So you can still afford those $22 at the grocery store because you're getting paid a little bit more. What has happened more recently is that the government has pumped a lot, a lot of money into the economy. Mr. Biden's $1.9 trillion COVID-19 relief bill

is nearing the finish line. The House has passed the stimulus package, which is among the largest in U.S. history. And the worry is that there's going to be so much money, so much demand, that supply is not going to be able to keep up, and so prices are going to start to go up, and it could kind of get out of control here.

Just because you care doesn't mean you don't also have to count. I am worried in both the short and the medium term about overheating. I think that you can also kind of pull this out into specific products where we're seeing prices really take off. So you've seen probably some stuff about lumber, or maybe you've tried to buy a used car and have discovered it costs a lot more than you thought it would. I'm more of a bike guy, but I hear it's even really hard to find a bike right now. But we did talk about lumber on the show with our colleague Jerusalem. Another thing that's actually constraining supply of houses is that as the market tries to keep up and build more homes, lumber is actually way too expensive right now.

How did lumber get so bonkers again? The industry hasn't been doing super well for a long time. If you think back to the housing crash in the early aughts, people haven't been just buying a lot of wood. And so I spoke to one sawmill owner named Steve Swanson. I'm the president and CEO of a Swanson group. We are a family-owned forest products manufacturer based in Oregon. Steve has one sawmill and two plywood mills in Oregon, which is basically the place that the logs go to become the lumber, the product, right? And what he says is that since 2007, his business has been bad.

Housing starts plummeting. So obviously the prices of commodity products like lumber and plywood just fell to the floor. He sold off a sawmill that he had before. He shut down two others. He cut down his workforce. And just year after year, things were not great. Then the pandemic hits. And so a couple of things go on there. Number one is that back in April, March of last year, a lot of people in the industry,

including Steve, kind of ramped down production. They think, OK, the economy is probably going to look bad for a while. I mean, you can remember back to last year in March and April when we didn't know if we were going into another depression. They feel the same thing. We closed the country down and our markets once again plummeted. And companies like ourselves were on the verge of going out of business. We had to make dramatic cuts in production to stay afloat. But demand picked up unexpectedly. A lot of people were sitting at home and realizing that they hated their home. So they decided to build out an office, to build a deck, things like that. Or they decided to move all together and maybe build a new home. And so what you kind of have

found is this real disconnect between supply and demand. So in the moment that there was a need for more lumber, it kind of took the industry a while to pick up on what was going on. And then once they did pick up on what was going on, it was kind of too late. We had employee issues when we tried to ramp up. I mean, and we continue to have employee issues. We struggle every day to have enough people to run our facilities. And so you have this really big imbalance where you saw, especially a little bit earlier this year, lumber prices really skyrocketing. What's going on with lumber now?

So you price lumber per thousand board feet. Per thousand board feet. Per thousand board feet. That's a lot of feet. Yes. It's basically one board foot is 12 by 12 by one inches. So historically, like in the past several years, lumber is traded around $200 to $400 per thousand board feet. And we started to see earlier this year it surpassed $1,000, then $1,200, then $1,400.

Got pretty crazy. But prices have started to come back down. So I'm looking today, and it looks like the price is about $800, $900. So it's not where it was before. But things have started to settle down. I still make lumber every day, and I can't store it up in my lumber yard. You know, we have to make it, we have to sell it. So we're going to sell it whatever the market will bear. And we take a few bucks off until that product begins to move. Okay, so lumber prices have been on this roller coaster. But what exactly does that tell us about inflation?

For a lot of people, it kind of means that the fear of runaway inflation is overblown and that the economy just has some weird bottlenecks and kinks to work out, but that they're going to work themselves out eventually and that inflation is temporary, that a lot of these price changes are just the economy getting back to normal or getting back to the new normal. You know, we shut a lot of things down last year, and it's going to take a minute for everything to balance itself back out. You also mentioned used cars. What's up with those? So I have not tried to buy a car lately, but I know a lot of people who have, and prices are up a lot.

These days, cars are a bit like a fine wine that becomes more valuable with age. Sure, it's lost some of its shine, but a used car is more desirable than a vintage Bordeaux. The price of used cars overall went up by 7% in May, and they were up 10% in April. And what's going on with the cars? Same deal as lumber? It's a similar sort of supply and demand issue, but it kind of has its own kinks and twists. When we saw a lot of people want to build a house or build a deck last summer or this fall or even this year, a lot of people wanted cars, whether it be because they want to go on vacation and weren't comfortable flying maybe,

or I live in a big city, maybe in a different world I wouldn't have wanted to take the subway and I wouldn't have wanted to drive. And so it's a similar situation. The used car market also competes with the new car market. And in manufacturing, including of new cars, there is a shortage of semiconductors, which are basically like the chips that you put in cars to make them work. Because of that, there are fewer new cars going into the market. Further complicating the supply side are the people deciding it's a good time to hang on to their used car instead of buying something new. Early on in the pandemic, when there were lockdowns and very little travel, rental car companies began to sell off some of their fleet. Now they're trying to restock and they're in the hunt for used cars. I think the big question with used cars right now,

again, for now, is that the prices are not coming down yet. And what do used cars tell us about inflation? We don't know when this whole microchip problem is going to be solved. We don't know when international shipping is going to be figured out, which is also a component of this. And so I think sort of you can tell a different story with used cars. If you think that the lumber story is that things kind of work themselves out and already are, the used car story is we don't know when this is going to work itself out. It hasn't yet. And the longer it doesn't work itself out, the bigger a problem it becomes.

In a minute, Emily's going to take us back to the 70s when neither of us were around, but inflation certainly was. Support for Today Explained comes from Aura. Aura believes that sharing pictures is a great way to keep up with family. And Aura says it's never been easier thanks to their digital picture frames. They were named the number one digital photo frame by Wirecutter. Aura frames make it easy to share unlimited photos and videos directly from your phone to the frame. When you give an Aura frame as a gift, you can personalize it. You can preload it with a thoughtful message, maybe your favorite photos. Our colleague Andrew tried an Aura frame for himself.

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Today, today explain. Emily, we've been talking about the most recent inflation in the United States, but it pales in comparison to the kind of price hikes and currency fluctuations we've seen abroad, right? Right. I lived in Argentina for a long time and kind of lived this firsthand. To give you an idea, when I first moved

down there in, I think, 2008, it was about three pesos to the dollar. Now, I think on the black market rate, it's like well over 100 pesos to the dollar. So that's quite different. And so the world is quite different there, right? You buy things in quotas because you might as well go into debt, right? Because your money is going to be worth a lot less than it was when you bought something. Or you see restaurants that will kind of write prices in pencil so that they can scratch them out and change them. But the U.S. is not Argentina. And we should also note that here in the United States, it isn't necessarily bad for prices to rise. I mean, a cup of coffee used to

run like a nickel. And the other day I saw an XL flat white almond milk run like seven bucks. Yeah. I mean, some inflation is natural. And I would say even good to a certain extent, we don't want deflation to happen. We don't want prices to go down, which is that's not good for the economy either. A couple of really nasty things happen when that happens. The first thing is that people stop shopping altogether. Why? Well, because they're waiting to see if prices are going to fall further. And if they stop shopping, it means you get this buildup of inventory in warehouses. So they say to manufacturers, well, I don't need any more stuff. So manufacturers stop making things. And what does that mean that they do? They start laying people off. So the Federal Reserve, which

sets U.S. monetary policy, says that it wants inflation over time to average out to about 2 percent. So basically average out to about 2%. So basically, everything should get about 2% more expensive every year. Forever and ever and ever? Yeah, like the whole idea is like a little bit of inflation is good because it's good for the economy. And what they are really trying to target is that 2% inflation rate and then full employment or at least like the lowest unemployment rate possible.

And so they're constantly trying to balance that. And the last time the Fed really had to roll up its sleeves and get involved was in the 1970s? Right. So whenever anybody's going to scare you about runaway inflation in the United States, they are going to tell you about the 1970s. So that was often described as this era of quote-unquote stagflation, where you saw a lot of inflation, but the economy wasn't growing. Between the recession and inflation, this administration is taking you to the cleaners. I'll get away. You can't walk away from it, Archie.

You've been pinching pennies for months. And they couldn't quite get it under control. There were also a lot of other economic shocks, whether it be high oil prices. This has become common in many states in the east. Cars have been lining up before dawn. By the time the pumps opened, many had been waiting two and three hours for gas. Or then President Richard Nixon ending the dollar's convertibility to gold. So a lot of things happened. It was a special set of circumstances. But basically, inflation really took off.

And that is why people today, when they talk about something that they're nervous about, they talk about the 70s. And how did Uncle Fed work it out? So what they did is that they're nervous about, they talk about the 70s. And how did Uncle Fed work it out? So what they did is that they raised interest rates so much that they pushed the economy into a recession. So to give you a sense of how drastic this was, right now, the average mortgage rate is about 3%. And in 1981, it was about 20% or close to it. So they made it really expensive for you to borrow. The idea is that, you know, again, you put the economy into recession, people lose their jobs.

It's not good, but the theory is sort of that's the only thing you can do if things get really out of control. So the Fed jacked up interest rates in the 1980s in response to rising inflation. Is it doing anything right now? For now, no. But the Fed also isn't not paying attention, which I think is an important point to make here. I would hope they're paying attention, Emily. It's their job. Well, right.

But, you know, the way that you hear some people talk, it's like the Fed's never going to act and this is all going to spiral out of control. The thing that I can't understand is when you have really robust growth, tremendous improvement in the employment market and prices are right. It's not like the inflation picture is benign and they are still in such an accommodative mode. This, I think, is dangerous. But Jay Powell, who is the chair of the Federal Reserve, has said, listen. Inflation has increased notably in recent months. This reflects, in part, the rebound in spending as the economy continues to reopen and the exacerbating factor of supply bottlenecks, which have limited how quickly production in some sectors can respond in the near term. As these transitory supply effects abate, inflation is expected to drop

back toward our longer run goal. That being said, he has said, listen, if we do think the economy is running too hot, like we're obviously going to do something. I think the question is when. And when you think back to, you know, six years ago, what happened was that we were starting to see these concerns about inflation bubble up. Back in 2015, when Janet Yellen was chair of the Federal Reserve, she is now Treasury Secretary. She bumped up interest rates just a little bit, but that did kind of cool off the economy in a way that some people will criticize her and say that she acted too soon. And so it's a really, it's kind of a tightrope here where you do want the economy to get better, but you don't want inflation to take off so much that,

you know, it gets out of control. So Jerome Powell is in charge of the Federal Reserve. He was appointed by the former president. Were they tight? And what's his relationship like with the new guy? Well, I think that the former President Trump would have really liked to have gotten Jay Powell to bend to his will and did not. And that's part of the reason that Trump and Powell had a bit of a I don't think they had much of a relationship at all. But but the president would fire off tweets about Powell. The president has been attacking the Fed chair on Twitter very often for raising interest rates. A lot of people think that this is because

the president wants a straw man to attack, say it's not my fault if the economy looks bad on election day. I think Republicans right now are saying, listen. The Biden inflation agenda of too much money chasing too few goods is causing major harm to hardworking families. Consumers are feeling the real cost of what White House chief of staff called the most progressive domestic legislation in a generation. Where's Joe Biden? He will not talk about inflation, even though he's proposed $7.1 trillion in spending. So today we have a contest that you

guys all get to participate in. It's like the price is right, but now it's the price is wrong because the wrong things are happening. The price is wrong, bitch. And Biden and Democrats are kind of likelier to agree with this argument that the Fed is making now that, listen, we think that the inflation is transitory. We think that a lot of the weirdness that we are seeing right now will pass. I should note that we don't know yet if Biden is going to reappoint Jay Powell to the Fed. But the point is kind of like we want the Fed chair to not really talk to the president at all, even though the Fed chair is not really talk to the president at all, even though the Fed chair is not immune from politics.

All right. So it seems like we're going to be on this roller coaster for a minute. Fluctuating prices, shortages. We didn't even talk about the chicken wings, but that's a whole issue. for sure whether this was just a transition as the economy opens back up or whether we have genuine inflation problems here. I mean, honestly, nobody knows. Anybody who tells you that they know what is happening in the economy right now or with inflation is lying. It is tricky. A year ago, we didn't know what was going to happen. A year from now, we don't know what's going to happen. I do think it's important to remember that, you know, if inflation becomes a problem, and I think that's a big if, the Fed has tools to combat it, right? They can raise interest rates.

Also important to remember, the 1970s is not the only thing in history that has ever happened, which sometimes I think a lot of the people who want to scare you about inflation would like you to forget. And, you know, the U.S. isn't going to be Venezuela. The U.S. isn't going to be Argentina. We have the tools here to kind of deal with the situation on inflation if it happens. But the economy is really weird right now. Like for someone like me, it's kind of fun to watch the ride, but it's also a little scary and it's understandable to be scared.

Emily Stewart, you can find her reporting over at Vox.com. She's also doing some hosting in our Vox Quick Hits podcast feed. You can find that wherever you find this. This is Today Explained. I'm Sean Ramos for them. The team includes Miles Bryan, Victoria Chamberlain, Halima Shah, Will Reed, and Emily Sen. Our engineers are Fiume Shapiro. Our editor is Matthew Collette. Our supervising producer is Amna Alsadi.

Our veep of audio is Liz Kelly Nelson. And her deputy is Jillian Weinberger. We got jams from Breakmaster Cylinder. Our facts are checked by Laura Bullard. Our email is todayexplained at vox.com. And Today Explained is part of the Vox Media Podcast Network. Thank you.