I’m going to attempt the impossible with this one: making economics not necessarily fun, but painfully relevant to someone who cannot work an Excel document.
The United States is experiencing the fastest increase in prices since at least the peak of the subprime boom back in 2008 – in April inflation was already up 4.2% from a year earlier – generating waves of criticism for the Biden administration, whose spending plans are credited with artificially spiking demand. (Normally, the government aims to keep annual increases below 2.0%). At first blush, I really don’t see the April data as a big deal. Everyone remember what was going on a year ago? Coronavirus-induced lockdowns cratered demand, which meant that prices were falling quite a bit. This 4.2% increase from a year earlier is really just a reversion to the mean.
But that said, yeah, it is going to get much, much worse over the next year or so.
Arguably the single biggest reason for the price increases is that Americans are getting out. The country is now majority vaccinated and since COVID is a respiratory pathogen, it has more difficulty spreading when people are outdoors. Aside from the most introverted of agoraphobes who have loved COVID lockdowns, everyone is jonesing to get out of their home this summer and to some version of “normal”.
Market tightness will become particularly noticeable in food. Traditionally, half the food consumed (by value) is eaten outside of the home. A year ago when the lockdowns began, there was simply too much steak and cheese and bacon and not enough flour and chicken and milk. Agricultural production and processing systems contorted to make the adjustment. Now everything is going the opposite direction. There isn’t enough steak and cheese and bacon to support rapidly-shifting demand patterns.
Energy is rapidly evolving to match, for reasons typical, atypical, and downright weird. There’s a normal seasonal increase in demand as farmers start planting in March, and as spring breakers hit their “hold my beer” parties. That increase doesn’t typically stop until autumn. So cyclically, we’re on the “normal” early part of the demand ramp up. And it is happening as Americans are starting to get back to their lives and so are driving more. And we have summer car vacation season just around the corner that pretty much everyone is looking forward to. Hell, I am planning a road trip. I hate road trips and yet I. Cannot. Wait!
On top of that we’ve had a few hiccups across the energy sphere. A container ship clogged the Suez Canal for a week, blocking about 10% of global energy flows. Texas had a freak freeze that took some 3 million barrels of crude production – over 20% of US output – offline for a couple weeks, along with all the downstream refining and petrochemical work that actually brings us usable products like plastics and diapers and tires and cosmetics and…face masks. Russian hacker group DarkSide took down the Colonial Pipeline for nearly as long, interrupting gasoline flows to half the Eastern Seaboard. A new, horrific COVID wave in India is threatening port operations, potentially impacting half the country’s oil supply. Individually, each is an event of global significance. Together? Damn.
Nor are Americans staying put. The Boomers, America’s largest-ever generation, are moving to warmer locales as they retire en masse. The Millennials, America’s second-largest-ever generation, are moving away from the major coastal cities to places where they can afford single-family homes so they can raise their new families. No one wants to be in a bus or subway everyday where they might be exposed to COVID. Collectively, mass relocations are adding huge demand pressures to any and all suburban locations, particularly those in the South, Southwest, and Mountain West.
In the world of manufacturing, the pressure is even greater. On the demand side we’ve seen a lot of sloshing around this past year as people in waves decide they all need new computers or phones or home additions or furniture. We’ve not seen this level of erratic consumer behavior in the modern era. The world of global manufactures simply cannot keep up, and retooling to meet demand in one area almost by definition means insufficient supply for another. The issue of the current quarter is surging demand for electronics has meant there are not enough semiconductors available for automobile manufacture.
The broader supply side is a more national issue. American firms, rightly spooked by disruptions physical, political and medical are relocating many of their supply systems to North America to insulate themselves from global disruptions. The shale revolution has made energy costs locally lower than they are globally, while the U.S. workforce’s high productivity has made most manufacturing processes cheaper to operate in North America than East Asia. Of course, the industrial plant first needs to be built, and that absorbs just as many material inputs as expanding the housing stock.
There’s also a big risk on the near horizon. If the Biden administration’s signaling bears out, the United States will be boycotting the 2022 Winter Olympics in Beijing. That will turn what is an ongoing trade cold war into a full collapse of economic relations. Every American firm operating in China will need to decamp, either because the Chinese confiscate everything as punishment or because their competitors start slapping them with the label of “sponsors of the Genocide Olympics”. We probably are only seeing the tip of the proverbial iceberg in terms of relocation-driven manufacturing price pressures.
So far, Americans don’t care about the price increases, and they aren’t likely to soon. If you fear the subway, you will pay a premium to not have to use it. If you do not want to shovel snow, you will pay a premium to not have to do it. If your home improvement project is already three-quarters finished, you will pay a premium to complete it. If your new home office has demonstrated to you that you need a better set of headphones and a newer computer, you will pay a premium to get them. If you have not eaten out in a year, that first time out – the first twenty times out – you are going to have yourself a damn steak. Personally, I find myself in four of these five categories. Add in my shiny new snow blower and I’m in four and a half.