Takeaways:
1. Recent research from the Federal Reserve Bank of SF suggests that inflation is mostly due to supply factors, not demand.
2. I believe a big part of the supply-side inflation problem is due to a lack of competition. At least that’s what we see in the bike business.
3. Trying to slow the demand side of the economy to fight inflation does not solve the supply problem or the competition problem.
4. Please support your local bike shop!
Our family runs two small local bike and paddle shops. We’ve learned a lot about inflation over the last year. We’re stuck with the price increases our vendors are pushing through, because we can’t switch to other bike and kayak suppliers to get better prices. Nobody has enough supplies. There’s no competition.
The Fed agrees. A research letter published last month by the Federal Reserve Bank of San Francisco concludes that “recent” inflation is driven more by supply shortages than by demand pressures. That matters, because the solution to cost-push supply inflation is different than trying to solve inflation that’s mostly due to demand pressures. Here is their conclusion (with my emphasis):
Analysis in this Letter shows that supply factors are responsible for more than half of the current elevated level of 12-month PCE [personal consumption expenditure-ed.] inflation. This in part reflects supply constraints from continued labor shortages and global supply disruptions related to the pandemic and the war in Ukraine. While demand factors played a large role in the spring of 2021, they explain only about a third of recent elevated inflation levels. Factors that cannot be labeled as either demand or supply are also playing a nontrivial role.
These results showing that factors other than demand account for about two-thirds of recent elevated inflation highlight some risks for the economy. Because supply shocks raise prices and suppress economic activity, the prevalence of supply-related factors raises the risk of entering a period of low growth and elevated inflation levels. This risk depends crucially on how long labor shortages and global supply disruptions persist. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
The Fed researcher attributes a lot of the recent supply-side inflation to labor shortages, which is a euphemism for the impact of Covid I think, and “global supply disruptions,” which could be many things: higher transport costs, logistical problems getting parts to the places they are needed etc.
At our shops, don’t have a big problem with labor shortages — we’ve had a ton of Covid scares where staff had to stay home, but no problem finding great employees in general.
But we can’t find alternative suppliers to help reduce our product costs. Instead of investing in more manufacturing closer to where bikes are sold, big bike companies are instead buying up local bike shops. This article from Matt Stoller’s antitrust newsletter explains, and contains many examples of large bike companies buying up shops instead of investing in production.
The Bicycle Thieves
There's a bicycle shortage due to, yes, monopoly. And now the monopolists are trying to build a world without independent bike shops.
It’s a great read, with a ton of great links. Here are a few excerpts.
Today there are a billion bikes worldwide, and in some cities, biking is a key part of taking cars off the road, improving traffic and reducing pollution. The industry is also in the midst of a serious merger wave, with major bike producers vertically integrating, particularly in the retail sector. “One thing I frequently see in my news alerts but never tweet about: Trek sure is buying a lot of bike shops,” said Peter Flax, a writer at Bicycling magazine.
Indeed, trend during the pandemic has been the roll-up of bike shops. Specialized has added several new locations recently, while Trek continues to buy up stores at an even faster rate. Last month, for example, Trek acquired the BikeBarn chain, with eight locations in the Houston, Texas, area. Over the summer Trek also acquired Big Ring Cycles in Golden, Colorado, and Golden Bear Bikes in Broomfield, Colorado.
What happens after a purchase is important for the structure of the industry. Take Trek’s purchase of a local D.C. retail chain called Spokes. What’s going to happen? As a friend told me, “Spokes was previously a neutral vendor - sold multiple BIG brands (Giant, Trek, Specialized) but also some small brands. Now will only be a Trek store. Note that there’s already two vertically integrated Trek stores in the area - one in Georgetown, one in Courthouse Arlington.”
Once the independents are gone, then it will be basically impossible to introduce new independent brands into the market. There will be a few big bike conglomerates like Trek, Giant and Specialized, who do various parts of manufacturing, retail, distribution component production, and assembly, and there will be SRAM and Shimano. And that’s it.
And that’s a shame. This industry is over 200 years old, but bicycles are still as great and as important as they ever were. Perhaps even more so today. There shouldn’t be a de facto floating cartel to control this industry. And hopefully, as we resurrect antitrust law, there won’t be.
Inflation Policy: Improving Supply is more important than Cutting Demand
The Federal Reserve is raising interest rates. This will mostly affect the housing market, where prices have skyrocketed, via higher mortgage rates. It will also reduce stock and bond prices, which have been artificially inflated by super-low (or zero) interest rates.
I’m OK with what the Fed is doing. Inflation in both housing and financial markets does seem in need of correction. And I think it’s good to have non-zero interest rates for safe investments like government bonds.
But if the main cause of inflation remains on the supply side, then we shouldn’t let the Authoritarian Party blame the demand side. It’s mostly not an over-spending problem, at least not by ordinary people who don’t buy stocks and bonds and can’t afford real estate. I don’t think government spending to help poor and working people should be blamed.
It’s fair to blame Covid for labor supply problems, and it’s fair to blame Russia for increases in fossil fuel and food prices. It’s fair to question our anemic antitrust enforcement here in the U.S., and it’s fair to blame companies (like bike companies!) that are focused more on buying up local bike shops than increasing production!
Inflation will probably recede over the next year or so, just like it receded in a couple years after the post WWII industrial dislocation. Let’s focus on the supply side and get more bikes (and kayaks!) to the people rather than cutting aid to the poor and working people.