Why stuff isn’t getting cheaper

While inflation has slowed down, prices are still high and businesses are reluctant to lower them. Some economists argue that this isn't just regular inflation, but "excuse inflation," where companies use one-time disruptions, such as supply chain issues and war, as an excuse to raise prices and boost their profits. For instance, the cost of oil and gas has surged due to the conflict in Ukraine and Russia, leading companies to pass on these increased costs to consumers. However, it becomes problematic when these price hikes significantly pad the companies' profits. This phenomenon highlights the importance of understanding the underlying causes of inflation and the role businesses play in shaping consumer prices.

Businesses, both large and small, have been implementing a pricing strategy of increasing the prices of their products due to supply chain disruptions and inflation, such as the case with chicken wings and Wingstop. Despite the drop in chicken wing prices to below pre-pandemic levels, Wingstop isn't lowering its prices, as this strategy has proven effective in maintaining profit margins. This phenomenon isn't exclusive to large corporations, as even small businesses have been adopting this strategy during times of supply chain disruptions and inflation. While consumers may not be thrilled about the price increases, businesses argue that it's a necessary response to maintain profitability. Competition should theoretically push prices down, but in some cases, businesses are holding their ground on prices, leading to a debate on the ethics of this pricing strategy.

Excuseflation, a phenomenon where companies raise prices in response to external factors beyond their control, can give companies de facto monopoly power by allowing them to raise prices in unison. This can lead to industries acting as a monopoly, with little incentive for companies to lower prices due to the lack of competitive pressure. Monopoly power can be fluid and temporary, arising during supply bottlenecks or industry disruptions. The Federal Reserve, which currently focuses on inflation and employment in its mandate, may find it challenging to take corporate profits into account when addressing inflation. While policymakers have discussed new approaches, it remains uncertain if the Fed will need to adapt its response to this new set of circumstances.

There are various factors contributing to the current inflation trend. Lael Brenard, before leaving for the National Economic Council, discussed the inelastic component of consumer demand, which some companies might be exploiting. However, policymakers are starting to scrutinize such activities more closely, with legislation targeting supply side disruptions. Additionally, the rich have disproportionately benefited from the pandemic, while the poor have struggled, leading to two distinct classes of consumers with varying responses to price increases. Jason Carrion from The New York Times identified another factor, gentrification of the economy, which might be exacerbating inflation. These factors, combined, are shaping the current economic landscape and influencing price increases.

Companies are increasingly focusing on premiumization as a strategy to add value and justify higher prices for their products. This trend, which caters to higher income consumers, has been driven by two main factors: the desire to differentiate products and the need to offset input cost increases. The phenomenon is prevalent across various industries and can be seen in the form of added features, improved branding, and higher quality. For instance, movie theater chains like AMC are offering tiered seating with the most expensive seats in the middle, while companies like WD-40 are introducing smart straws to their lubricant cans to add value. This trend, often referred to as "premiumization," is a popular buzzword among executives and has been a significant contributor to profits for many companies.

Companies are finding innovative ways to differentiate their products and charge more by offering added value or convenience, such as WD-40's adjustable spray nozzle or premium pet food. This trend, known as premiumization, has been accelerated by the pandemic and the resulting increase in consumer spending on household items and pets. The humanization of pet ownership and the desire to provide the best for our furry friends have led to a significant increase in spending on pet food. While some may view this as a niche trend, the impact of premiumization can be felt across the entire economy, potentially contributing to broader inflation trends. Economists are starting to notice the role of profit-led inflation in the economy, making it an important topic to watch.

The current economic environment, marked by reduced energy prices and increased corporate profits, is leading to a two-tiered economy with potential negative consequences for lower income households. This dynamic, which is already contributing to inflation, could result in a permanently unequal economy with higher prices for essentials and luxuries. The car market is an illustrative example, as the share of affordable new car models has significantly decreased, leaving many people priced out of the market and driving up used car prices. This trend, which also impacts other industries, could lead to less economic stability and increased inequality, with potential ramifications for politics and society as a whole. Economists are uncertain about the long-term consequences, but agree that the situation is complex and uncertain.

Successful investing, whether it's in real estate or fact-checking, requires a keen eye for quality and a willingness to pay a premium. Paul Robert Mounsey, the engineer behind a successful produce business, and Laura Bullard, a fact checker, both understand the value of top-notch products and are willing to pay more for them. Currently, the real estate market is experiencing a downturn due to high interest rates, but the Fundrise flagship fund is taking advantage of this by expanding its portfolio with high-quality assets. For individual investors, this fund offers an opportunity to invest in real estate with a minimum investment of $10, making it accessible for those looking to buy low and sell high. However, as with any investment, it's important to carefully consider the objectives, risks, charges, and expenses before investing.