"The point is simply this: it’s very easy to spend a lot more these days on fast food in ways that don’t necessarily show up in inflation data."
As well they shouldn't because, you know, they aren't inflation. Obviously it costs more to get more stuff, or higher quality stuff. That's not inflation; it's just spending more. How, exactly, is government policy supposed to be responsible for that? And how does anybody imagine that any kind of political solution is going to make it stop?
Anyway, the point of the Post article, which you didn't really engage with, is that people aren't very good at gauging inflation because they don't pay careful attention to what they buy. Consequently, they interpret any increase in their spending as an increase in prices, even if sometimes the real culprit is that they're buying something fancier. I don't know if calling this phenomenon inflation qualifies as "misinformation", but it's surely not accurate. It's kind of weird that you are framing an article calling it out as such as some kind of sinister propaganda from the administration. It's just facts, my man.
Yeah, I think Nate's article is important as analysis of why people feel like inflation is high when it objectively is not (anymore). The back-and-forth with the WaPo piece is less enlightening since that wasn't really an econ piece so much as a political "Biden admin struggles with X" story.
Sadly though, there appears to be a big motte and bailey argument here as witnessed by the comments. Nate's motte is "clever analytics getting people to buy more expensive stuff may cause perceptions of inflation to differ from actual inflation" but a lot of people here are taking the bailey "inflation is actually way higher than official statistics indicate due to corporate skullduggery and/or bureaucratic ineptitude."
I'm confident Nate would agree with me that the official statistics, while of course imperfect, do a good job of measuring the price level. Given that, the disparity between the 3.2% inflation rate and public perception demands some explanation; historically those two things have been closely linked. Other explanations I find plausible are that people just have a pretty long time lag (i.e. "perception inflation" is more closely linked to the 24 or 36mo rate than the 12mo rate), and that today's population mostly has never experienced high inflation before so it was more of a psychological shock than it was in the past. But this factor seems like a good one to add to the list.
This fits with a slightly different paradox about the economy. People tell pollsters that the economy is terrible, but they are consuming like the economy is great.
One explanation that makes sense to me is that we are all still processing pandemic trauma. Not saying we all have PTSD, but collectively we are seeing all the glasses as half empty.
Yeah, Paul Krugman has been harping about that disconnect for a while too. In addition to the spending/polling divergence he notes there's a big difference between polling on *personal* economic circumstances vs. "the economy" with the former much more positive. So in Krugman's formulation everybody seems to think "bad things are happening in the economy...to somebody else."
_Some_ people are consuming like crazy. Consumer spending has been propped up for some time now by six figure earners. It's everyone else that's got problems.
>Other explanations I find plausible are that people just have a pretty long time lag<
I think this is undoubtedly true, and a big part of the answer to the question "Does Joe Biden win another term?" Assuming no obvious disasters for this White House (recession, a big spike in gas prices, etc) Biden probably gets reelected if, by this time next year, voters have adjusted to the post-pandemic price level. If they're still pining for 2019's nominal prices, Joe's probably a one-termer. At least that's how I see it.
(I also think this White House needs at least some help from falling mortgage rates; they don't need 3.5%, but they probably do need rates to fall by at least a point from where they are now.)
Yeah I've been thinking along those same lines. Ironically it kind of seems like the goldilocks scenario for Biden would be a little blip recession ASAP that spooks the Fed into dropping rates quite a bit followed by a strong recovery.
On the other hand even if views of the economy don't change that much next year, the issue's salience might. There will be a lot on the ballot, and if people's personal situations are good they might be inclined to vote those other issues instead of voting their bad econ vibes.
That's not how the Fed works with regards to recessions. The concern is that since the metrics that the Fed uses to decide when to cut are lagging measures that by the time they cut it will already be too late.
Sigh, yes I do, but I pay attention to the facts they report, not the constant negativity bias. And throughout our conversations I've been going to FRED and actually looking at the numbers. And I've actually watched the Fed react to recessions, and it very much is the way they work.
Just look at the rate around the shaded areas denoting recessions. Rate decreases do not lag the start of recessions.
You seem to base every comment on working backward from the conclusion "the economy is terrible" in whatever way you think is most expedient in the moment. You're using the data as a drunkard uses a lamppost: not for illumination, just for support.
What are you talking about? The idea behind a "soft landing" is to cut _before_ the country heads into recession.
In another comment you responded to posts from Fortune and other mainstream media outlets (including the WaPo) as "editorializing" about cuts in consumer spending, concerns that have been circulating in the financial press for months now as pandemic savings dry up. Do you think those articles are fake news or something?
30 year fixed rates have fallen for the last five weeks, dropping 57 bp. (https://fred.stlouisfed.org/series/MORTGAGE30US). Obviously, they're still much higher than they were two years ago but if the trend continues then I bet public angst declines a lot.
If inflation is so low why is the Fed keeping interest rates pegged at 5.25%? Maybe you should send a letter to Powell to let him know he can start cutting.
How is consumers choosing to spend extra on non-essential items (like McDonalds) evidence of economic distress? If anything it suggests Americans feel economically secure.
Seems like there's a weird hedonic treadmill thing occurring where people don't notice/become numb to their subtle upscaling of consumption, but are hyper-aware of the nominal amount of money going out the door.
you are a first rate propagandist...suggesing we are all just morons but not saying so explicitly while crediting the White House and its propagandists in the media with the mental acuity of future AIs.... i suppose you think future AIs should imitate the @nytimes reporting or the New Yorker... For your info, I have kept spreadsheets on our expenses for years in consistent categories. I do it because a) I have multiple decades of analytical and forensic experience on Wall St so I am wired that way...to know the facts b) I am retired and while we are comfortable for now, I also know that if I live long enough, with a FED that thinks 2% degradation in my saviings value is ok, if I live long enough, I will the same overall shock that I do when I pay nearly $3 for a subway ride that cost me 5c when I was a kid. And I tell you point blank, COSTS MORE than it did 2-3, 4 years ago AND like everyone else, I KNOW it will never go down and am not fooled by a one month slightly lower rate of increase than the prior 12 mos, 2 years and 80 years. Save your BS for yourself.
To the degree your rant is coherent at all, it seems you will only be satisfied with *zero* inflation. A basic grasp of economics would tell you that's a bad thing to wish for, but even without that I would hope you could recognize that we haven't *ever* had zero inflation for an extended period, so maybe, just maybe it's not the right standard to hold a specific presidential administration to.
Also a great example of people's selective memory regarding prices vs. income. Yes, it is undoubtedly true that prices are much higher than they were in 1948 (when subway rides were last 5c), but the median household income has gone from $3200 to $75k in that period. Looking at the overall CPI, prices have increased about 12.5x since 1948, while income is up 25x. But let me guess: all your income increases over the course of your life were 100% because of your hard work and cleverness, nothing to do with the economy...but the price increases are 100% those dastardly elites using their corrupt Fed to steal your hard-earned money. And somehow this is all to be laid at Biden's feet.
CPI on 2023-10-01 was 117.1% of what it was on 2021-01-01.
Average hourly earnings, all workers, same dates: 113.6%
Average hourly earnings, nonsupervisory, same dates: 116.0%
Those tiny gaps are what you use to explain the public having more negative views of the economy than they had in the depths of the financial crisis recession? Sorry, but the mismatch of perception to reality is an actual thing. Polling shows the public thinks we have historically high unemployment for Pete's sake.
Of course that wouldn't make me happy, but that's pretty far from the point. First, 117.1 is 3% more than 113.6, not 4%. And for the vast bulk of workers, the <1% difference (117.1/116) for nonsupervisory is more pertinent. And that's over a *four year* period. So we're talking about annualized disparities of 1/4-3/4 of a percent.
Is that good? Well no, any reduction in real wages is clearly bad. But it's also almost certainly below the threshold where people would actually notice it, particularly in the context of "both numbers are going up" rather than "small but clear reduction in my paycheck." Certainly it's not at a scale that explains people having a more negative view of the economy than they did when unemployment was 8%. And it doesn't explain why people are directly answering polls saying inflation is higher than it is, wages are not growing when they are, and unemployment is near record highs when in real life it's near record lows. There really is a disconnect between economic perceptions and economic reality right now, and it really deserves study.
As an aside, don't forget the reduction in real wages is firmly in the rearview now. Using the last 12 months instead of 24, all-worker and unsupervisory-worker wages gained 4.1% and 4.4% respectively, while CPI only went up 3.2%. So workers have been beating inflation for at least a year. It's entirely possible that the public just takes a longer view than the econ stats we customarily look at. But one way or another, the current economic data just doesn't support the public sentiment data we have. It's a real thing.
What's the cost of the new deluxe Western bacon burger now versus the cost if the same product had been introduced a few years ago?
Making an apples to apples comparison may be difficult but nobody seriously doubts that the costs of the raw ingredients have gone up, the cost of the labor has gone up, and therefore the cost of the finished product should be higher now.
I would argue that the increase in food costs has been so dramatic over the last few years that is has forced people who otherwise wouldn't care to sit up and take notice. And that group certainly doesn't include housewives and other individuals responsible for household shopping. Think of the coupon clipping mother who is undoubtedly laser focused on costs. What's her experience going to be these last few years?
I know exactly what I'm spending on fast food because I order the same thing every time and have for 20 years. The three items cost me $4.24 pre-scamdemic, but now cost me $6.58. And that's without an overpriced sugar water.
This reminds me of the argument I've read that people often complain about higher prices for houses without taking into account that houses today are bigger and offer more amenities than houses from decades ago. I've read similar arguments for car prices, where cars today are safer, more reliable, and have more features than cars from decades ago.
I think a lot of these arguments are really about the disappearance of super-low priced versions of products like housing or cars.
20 years ago, you could buy a car at the average price and get a 2003 average car. But you could also find a junker for $250, let's say 2SDs below average. Almost anyone who wanted a car could get one.
Today, you can buy a car at the average price and get a 2023 average car. You get a much better car! And it probably costs fewer work-hours at an average salary than the 2003 car.
But 'Cash for Clunkers' gutted the very bottom of the market.* It's coming back a bit now, but for a while, the used car market under the (I think) $2,000 price point or whatever the feds paid for used cards was nonexistent. If you needed an emergency car, or if you were 17 and kicked out of your house, no market existed.
It's similar for housing. My house is much nicer than a similarly priced house in 2003, or 1923, etc. However, there used to be a greater variety of 'bottom of the market' options, up to and including renting a one-bedroom apartment with eight other people who just got off the boat, or halfway houses for folks getting out of prison, or bunks in the back of a church. We've legislated most of these out of existence, and those that still exist tend to be run as non-profits serving specific populations that are exempted from standard housing requirements.
So while you're right, I do think the 'bottom' of many markets has been hollowed out in a way that causes hardship for some people.
*Which was kind of the point, because the clunkers had terrible gas mileage and were terrible for the environment.
This, exactly. It doesn't matter that now you can get a car for $20,000 that's ten times as good as the one you used to be able to get for $10,000 if you don't actually have $20,000 to buy it with and there are no $10,000 cars available. (numbers are completely made up)
That might be related to where you live. Here in CA, the houses in my town are 90 years old, 800 sq ft, and $700,000, up about 35% from two/three years ago.
Sounds like here in Melbourne: 60-year old houses, unrefurbished, going for close to a million, is quite standard. And that’s not the fancy suburbs either!
I thought part of Nate's argument was that McD was upselling people like the guy from Idaho by selling them limited-time deluxe items, like a deluxe Double Quarter Pounder with Bacon and BBQ sauce.
If you normally go out to Texas Roadhouse for your Friday night meal with the family but are now going to McD's instead you may as well get the deluxe burger. It's still cheaper compared to the steak you're no longer getting.
Ok but that's in direct conflict with the pattern Nate is describing, right? Certainly at any given time many people are trading down and many people are trading up. But in the aggregate, if the population were trading down from TR to McD we would see spending growing more slowly than inflation.
No, because you need to look at spending broken out by income level. Spending had been propped up by six figure income earners for a while now. That is not reflective of what's been happening with the majority of the country.
Great insight. I have some questions about the last part from a data perspective though.
1. The personal savings rate probably needs some kind of adjustment for demographics to be meaningful in this context. With boomers retiring in droves we should expect that number to be low right now. Does it still look low by historical standards if those effects are controlled?
2. You footnote the fact that the PCE-PCI chart has a weird starting date effect, but say the effect is still there measuring sept-2019 to sept-2023. That's fine, but we need a frame of reference since as you note PCE normally goes up more than PCI. So if it was 30% vs 20% over that period, what was it for say, 2014-2018? Given that the majority of the difference in your chart happens in *one* month out of the 24 months plotted, I feel like more investigation is needed on that one.
My hunch is that the big growth in difference happening in spring 2021 was (1) when people started getting their $2000 "Biden Bucks" check from the COVID relief act, and (2) when people first started to get the COVID vaccine and felt like they could go out and have fun again without fear of the virus. I know I was in a celebratory mood around then, with money burning a hole in my pocket, and suspect a lot of people felt the same way. Ofc new strains of the virus began appearing and mask mandates came back circa summer 2021, but for a few months there it was a lot of increases in consumption all around
Yeah I think that's clearly a big factor in the bump. If I wasn't so lazy I would pull, say, June 2021 to June 2023 and compare the PCE/PCI growth ratio to the 2-year periods from the decade or so before COVID to see if the ratios were similar. If that ratio for 2021-23 is way higher than those years, we might have a real effect there, but I'm skeptical that's what we'd see.
The savings rate had a big drop from Q2 to Q3 this year and real disposable income actually fell in Q3 despite the headline strong GDP growth (people spent more and borrowed more rather than saved). This is not good news. This is quarter to quarter data and has nothing to do with boomer retirements. On the other hand it is only one quarter of data. Let’s see how things look in Q4. A lot of the econ data is squirrelly due to Covid-related seasonal distortions
So, the Elizabeth Warren "inflation is just corporate greed" narrative has some truth to it...
On the other side, I wonder if a problem is that we're getting less for our money. 5 years ago, that Big Mac meal would come with a larger well-maintained dining room, a play area, and visible employees to help with missing items. Now, it's an order from a kiosk, not much visible help, a tiny dining room with no play area, and a prompt for a tip.
There's also a fair amount of consumer greed at play. I can't begin to imagine the amount of calories in the average McDonald's order, but it's got to be well beyond recommended levels for a meal. It does seem like we are getting worse at impulse control as the years go on, and being in an actually strong economy isn't hindering that at all.
As I saw in another comment, I think there was a bit of a hedonistic backlash to the pandemic and the supply-chain disruptions that has metastasized into habits that are not sustainable. I've observed this in myself, and am working to break them.
McDonald's has been around for generations. There has been a boom in fast food sales recently but I suspect that's because inflation is putting other, more expensive varieties of restaurant dining out of the reach of a lot of Americans.
I think Nate's argument here is rather different than the greedflation theory. The problem with greedflation is that it lacks an explanation. Presumably firms have always been greedy, so why does it only manifest now?
Nate differs in saying that it is more like a technological innovation than a random increase in greed. New technologies (apps, kiosks, ubiquitous delivery, data analytics) give firms new tools to encourage spending.
In traditional econ, I think this is a straightforward value add. People are getting more and better stuff, and are willing to pay for it. But living through it, we see that people are stupid and lack willpower, so maybe the new options end up being kinda coercive.
I mean, on one hand, your framing of the situation is certainly reasonable and is a decent explanation for the perceptions being bandied about that would speak about a McD's value meal coming up to some crazy price increase.
However, on the other hand, the framing put out by those trying to take advantage of the message that inflation is out of control - "Look, here's a McD's value meal that use to be $7.50 that is now $14!", is pretty disingenuous given the facts as well if you add in the secondary information that it's a upsold burger that wasn't sold 3 years ago as well as delivery fees, etc.
The thing is, we're still in an economy that's performing well enough to where the fast food chains are able to get away with increasing prices and adding stuff and the people are still buying it because either they can afford the convenience or they really think the extras provide the value they want. That might change if we were in a worsening economy.
“They really think the extras provide the value they want.”
This is great point, and we see it with food at the grocery store too.
If I used to buy factory farmed chicken but I’ve since concluded that free range chicken tastes better, I’m going to start spending more on chicken. But that’s not inflation, that’s me trading up and deciding that an extra cost is worth it for incremental benefits.
Overall food quality in North America has gotten so much better than it was 20 or 30 years ago. And people have realized that better options are available and are migrating to higher end products as society has become richer. Plus especially post COVID, I’ve definitely seen (and experienced myself) a bit of “fuck it, life is short” where I pay a few extra bucks for some item I previously might not have.
So it’s not inherently a bad thing that people are spending more money. It goes back to my other comment on this article - you can’t assume preferences are static. If people want to spend more and feel like they’re deriving a benefit, it’s very different than if they don’t.
Your chicken example is a great example. From an economic standpoint, that's a premium good that's being purchased more often. That's good as the standard option still exists for those that don't want the premium option.
From a political standpoint, it's an easy message to say that "Look, chicken is now double the price!". It's tougher messaging to explain the premium option (in 2023) is being compared to the standard option (in 2019). That said, it's an important point to counter honestly.
I feel like the same thing happens with autos. Autos are so much more expensive than 25 years ago, yes. But they also are a ton safer, have multiple computers in them, and are way more reliable overall. It's also not apples to apples.
I have to wonder if people are using fast food more as an alternative to eating out at fancier, "sit down" restaurants. In other words it's the same downward slide where Target loses customers to Walmart which in turn loses customers to the dollar stores.
I don’t think they are. I work for a small producer that sells high end food directly to restaurants and specialty shops as well as grocery store chains and distributors (not fast food, though). Overall, my restaurant and specialty sales have been trending slowly back up for the past 3 years, to the point that they are *higher* volume than they were pre-pandemic. What’s dropped like a rock are the grocery chains and the distributors supplying them. That’s where I’ve seen the most squeeze too — pressure put on us producers to give discounts, backcharging of fees, etc.
My read (and I’m one *very* small producer, to be clear) has been that the affordable luxuries — a nice night out, really decent food, etc — is not taking a hit, but the commodity market (basic groceries, fast food, late-night binges) is in flux in a big way; prices are going up and people resent it.
Some of that is corporate greed; some is that, in the food industry for sure, it’s been Robbing Peter time for several decades and we are now entering the era of Paying Paul. Commodity food prices in the US have been kept artificially low since at least the 1970s; for a variety of reasons, that’s becoming less and less viable.
That’s not really Biden’s fault, of course; insofar as an presidential administration has any control over the economy, he certainly didn’t have control over this — he was just the poor sod to catch the hot potato. But I do agree pretending it isn’t there won’t fix that.
Employment for the top quintile of the economy was higher in summer of 2020 than prior to the pandemic. White collar professionals in that segment are doing fine but I doubt that supermarket check out clerks are able to enjoy fine dining.
I don't think that's an accurate description of what's happening in the economy. As Nate notes, spending is growing faster than inflation. That means people are buying more and/or fancier stuff. Substitution down the value chain like you describe would be much more consistent with an economy where nominal spending is in decline or at least growing more slowly than inflation.
Is that spending averaged out across the entire economy? From what I understand consumer spending has been propped up by the top third of the economy while the bottom half of earners are hammered by inflation.
Dunno where you're getting that idea, but in the recovery since the pandemic wage growth has actually been strongest at the bottom end of the scale. Arin Dube's estimate was the breakeven was around the 40th percentile, so the bottom 40% of earners actually had their wages grow faster than inflation, whereas the top 60% saw their real wages decline.
1. It's not irrelevant to that question, as spending generally follows income, and it's not obvious why this case would be abnormal in that regard. Moreover it's *definitely* relevant to the other half of your claim: that "the bottom half of earners are hammered by inflation." They have been less affected by inflation than upper-income people, inasmuch as their wages kept pace while higher incomes did not.
2. Yes. Core and headline inflation numbers weren't that different over the medium term (as expected...the whole reason to look at "core inflation" is that current core predicts future headline better than current headline does). So, wage growth at the bottom was faster than both of them.
I have not seen anything suggesting that spending in the economy is any more lopsided than it was in the recent pre-pandemic past (to be clear, it's been pretty lopsided for a while). If you have, I'm interested to see it.
Certainly people replaced dining experiences with delivery experiences during the pandemic (to some degree) and that has hung on (to some degree) now.
If you can spend $50 for two at Five Guys to have it delivered or go sit down at Chile's for $50, certainly many more people are now taking the Five Guys delivery in 2023 than 2019.
I really don't understand why media people feel like they have to go this far to understand why people think the economy sucks, or why they think that it is counterintuitive that people think that. Housing affordability is at its lowest level in recorded history. What more do you need? Housing is necessary to sustain life and fewer people can afford it than ever before. The end. The only thing that is counterintuitive is that literally anyone would expect people to be happy because the GDP is up or whatever even though they can't afford to rent an apartment.
Yes, definitely. That's the problem with infrastructure though (and I would consider housing to be infrastructure). You have inflation whenever demand outstrips supply, but sometimes increasing supply requires infrastructure investment. It just seems that housing costs are the biggest economic problem right now, certainly for all the younger generations, and I'm skeptical there's any way to address that other than increasing supply.
Yes, it's a wicked problem. To institute a mass home building campaign you would need to bring in large numbers of temporary workers, house them in cheap temporary accommodation and require most of their wages to be remitted home rather than spent in the US. Even then you'd be fuelling some amount of short-term inflation.
This article touched on this, but one huge underrated portion is that companies and industries tack on non-opt out fees to services.
Maybe this is purely anecdotal and not at all what’s going on, but I had to get my windshield replaced recently. I forgot the exact prices offered to me, but it was a couple hundred bucks. At the counter when it was time to pay, a new “recycling fee” charge was tacked on, which was somewhere over $50. This wasn’t reported to me online, and only appeared when I was going to pay.
Maybe the American economy has browbeaten me into just accepting these add on fees, but I doubt I could have opted out. (I genuinely didn’t ask, so if I could, that’s on me). But this trend of adding fees at the time of payment also has gotten worse and increased spending as well.
Hehe I had a surgery (kind of like carpal tunnel) a couple years ago where I carefully got a quote regarding it before agreeing because it was mostly out of pocket. Then when I get the bill there is a separate bill that wasn't part of the quote from the fucking room the surgery was in. So when I ask about this extra $1000 they are like "oh the quote didn't include the actual operating room itself, and that is a separate company so it wasn't part of our quote.
WTF did you think the surgery was going to be performed in an alley?
I would love to do this to a doctor someday. Sell them a car and then don't tell them it is missing the engine. If they complain just be like "hey engine sales are separate, sorry you thought they were part of the quote sucker!".
Yes it's been very hard to get a free market to function effectively in health care, in this country at least. There are lots of middlemen (to the point about the operating room) and it's not clear if they are providing any efficiencies or just multiplying costs. Presumably the market works well for veterinary care though, and so I feel like there are lessons to be found there. 🤷
Well, I think before I tried to copy the veterinary market where euthanasia is always available as a lower-cost option I just *might* consider looking at some other *human* healthcare systems that seem to work better than ours. It's not like we're bereft of examples.
Ha! Honestly hadn't been thinking about euthanasia when I posted that. Veterinary care has a lot of competition, and I don't think it's as hard to switch doctors or to get price quotes. But to your point (sort of), some people (not saying you did this) think, you can't put a price on life, or health, but, we do, when we're given the choice. I think in this country humans seldom consider cost when getting health care services, but a lot of health care is not life or death but just quality of life, some certainly more significant than other, and I'm not convinced all patients would consider a lot of it worth it if they could pocket the cash instead (which obviously you can't, but there has to be some way to answer the question, what's it worth to you). Anyway, yes we definitely need to do better. Our system works very well at the top, rather poorly at the bottom, and costs much more per person than any other wealthy country.
A portion of the increased spending is the ubiquitous tipping options that have been added as business transitioned to kiosks and expanded the breadth of business asking for such tips.
What’s missing from here is any acknowledgment of the possibility that people may *want* to be putting more stuff in their baskets.
Not necessarily fast food - I agree it’s annoying how quickly food delivery costs add up. But the idea that overall consumption is up and savings are down could just reflect changes in what people prefer to do with their money. I still don’t think we’re past the post-COVID “revenge spending” in a lot of areas.
Overall this explanation feels as half baked as the article it’s critiquing.
You can also call it The Deplorable, Flyover Country Citizens Theory. The people who don't have to care about whether prices go up a dollar on anything are the ones who are confused.
The number of journalists in that category, even at an outlet like the Post or the Times, is much smaller than the number of "flyover country citizens" who believe that all journalists are in that category.
CEO of Taco Bell spoke to our company, described the imp[act of electronic ordering. TB quickly introduced an app during the pandemic, objective was to minimize direct contact time at the window/counter. Unforeseen side effect - average sale per order for electronic orders was 15%+ higher than orders at window/counter. People ordered more food & higher priced options, maybe because the guy behind wasn't giving them the "hurry the hell up" glare?
No sorry. This was from an in-person presentation that the CEO of TB did for our company. He told the story, but there was no reference to any published information.
I would also add in a couple of related factors: shrinkflation and adulteration.
1. Shrinkflation
The portion sizes are smaller, sometimes in not so sneaky ways. I ordered beef with broccoli at a Thai place a week ago. The to go container was the same size as normal but inside was a mere three pieces of beef on top of a mountain of broccoli.
2. Adulteration
I am pretty sure some of the local restaurants are putting sawdust in their food and I'm only half joking. I ordered all you can eat wings at Crapplebees recently and what you get is a lump of tasteless breading with a tiny nugget of pink slime in the middle.
CPI technically tries to adjust for shrinkflation etc., but I've heard differing accounts as to how well it tracks it.
My guess would be that if General Mills is decreasing the size of all their cereal boxes nationwide, CPI is almost definitely catching that. There is zero chance it's catching the local Chinese place modifying the ratio of meat-to-vegetables/starch. Other changes are somewhere in between.
Yeah that feels about right. I will say that the more I learn about how BLS does its thing, the more impressive it becomes. There are doubtless many imperfections but it seems pretty clear that the results are generally accurate. Among other things, rigorous alternative methods (e.g. Billion Prices Project) agree with them. And on the other side of that coin, so far every case I've heard for some wildly different rate of "real" inflation has been hackish bad-faith nonsense that was easily debunked.
I mostly agree with this -- the best bet is to measure what is measurable and make adjustments carefully. I'm not especially conspiratorial here. I wouldn't be surprised if there have been political pressures at times to deliver a lower CPI number, but regardless I think the process is still generally honest.
I think it's also fair to expect that even with a perfectly unbiased and well-designed effort, the imperfections in measurement are going to be heavily weighted towards the side of failing to fully capture subtle decreases in quality or quantity, for the very simple reason that merchants are incentivized to obfuscate those changes while publicizing any improvements they may make in quantity or quality.
For example, when the cola makers replaced cane sugar with HFCS, they never publicized it. Maybe I'm wrong, but I doubt that CPI made an adjustment -- and if they did, it seems they'd just have been making up a number. But now the cola makers sometimes sell versions with cane sugar. Those are, of course, specifically marked and priced at a premium ("Pepsi Throwback").
And it's almost certainly the case that the number of attempts to get away with shrinkflation have increased over the last several years. So it's probably a fair bet that the amount of undermeasurement has also increased. But like you, I doubt anyone who thinks he can really quantify it.
I have no idea if Crapplebees is still doing the all you can eat wings deal but I suggest checking it out if it's still available. The correct comparison I think would be what would a similar deal look like a few years ago versus today, where the food being offered is borderline inedible.
In fairness, I think those are "boneless wings", which aren't wings in any sense of the word-- and it should probably be illegal to call them such.
I've only had "boneless wings" once, maybe 5 years ago, at a local wings place. They were half off that night and I was misled to think they were actually wings. They were also really gross, I only ate two of them.
If Applebee's had transitioned from all-you-can-eat real wings to all you can eat "boneless wings", that would be a strong point. But I don't know that they ever had a deal like this for real wings.
I think the McDonald's situation is more extreme than you posit, because prices seem to vary greatly depending on the region and exact location of the store. I recently paid $4.89 at a McDonald's on 1-95 in Connecticut for a medium order of fries; a combo meal of a grilled chicken sandwich, medium fries and a medium drink cost $16.00. (Obviously I hadn't looked closely at the menu.) Those are bonkers prices for that food, and you could get actual real food at that price point—a Chipotle burrito, for example. At a McDonald's in New York a couple days ago, I paid $8.50 for a medium coffee and a medium fries. Yes, I'm a glutton for punishment--but these prices have certainly made me think twice about going to McDonald's, and I don't see how they're sustainable.
@lainaminute did a great piece on this in LA county recently; essentially the average cost of an order at McD’s is a worthless metric because individual stores can price their menu however they want to (with some exceptions).
It creates some interesting questions, ones answered at a much more local level, all weighted evenly.
One difference is you might have found a deal ordering thru their app, or using a coupon. Walk ups or people who don’t have a smartphone or who don’t want to submit to tracking pay the published price.
is probably the most egregious example of this. You'll see prices are now hidden or confusing (mixed with combo prices and very small sandwich prices).
The value menu has shrunk considerably. Some known menu items (like Ice Cream or Happy Meals) aren't listed at all.
Nate, I would be very interested to hear your take on the proposition that economic data since covid has been much less reliable, mostly because of response rates/bias in surveys but perhaps for other reasons too? I'd like to say I trust the Fed to figure this all out but since I don't, I'd like to know what light you could shed on the situation. Which data is the most trustworthy, and what grains of salt should we be taking with the rest of it. And this overlaps some (or it should) with today's column, in that we're asking what's the best way to measure what's going on. Thank you as always!
Consumers save less when they feel good about the economy and save more when they are concerned. You see this in the FRED graph: savings rate goes up during and shortly after recessions (gray bands) and falls between recessions. Given this, I’m not sure I buy the low savings rate as an explanation for economic pessimism.
It seems totally plausible that people cut spending on travel and in-person services (massage or mani-pedi stuff) during 2020 and some part of 2021, switched over to more online shopping and ordering food in, and finally went back to traveling, driving, body care, while maintaining their upgraded shopping habits.
People have an incredible ability to get on the hedonic treadmill and get used to anything. In this case, shopping more in 2020 without ever dialing it back.
"The point is simply this: it’s very easy to spend a lot more these days on fast food in ways that don’t necessarily show up in inflation data."
As well they shouldn't because, you know, they aren't inflation. Obviously it costs more to get more stuff, or higher quality stuff. That's not inflation; it's just spending more. How, exactly, is government policy supposed to be responsible for that? And how does anybody imagine that any kind of political solution is going to make it stop?
Anyway, the point of the Post article, which you didn't really engage with, is that people aren't very good at gauging inflation because they don't pay careful attention to what they buy. Consequently, they interpret any increase in their spending as an increase in prices, even if sometimes the real culprit is that they're buying something fancier. I don't know if calling this phenomenon inflation qualifies as "misinformation", but it's surely not accurate. It's kind of weird that you are framing an article calling it out as such as some kind of sinister propaganda from the administration. It's just facts, my man.
Yeah, I think Nate's article is important as analysis of why people feel like inflation is high when it objectively is not (anymore). The back-and-forth with the WaPo piece is less enlightening since that wasn't really an econ piece so much as a political "Biden admin struggles with X" story.
Sadly though, there appears to be a big motte and bailey argument here as witnessed by the comments. Nate's motte is "clever analytics getting people to buy more expensive stuff may cause perceptions of inflation to differ from actual inflation" but a lot of people here are taking the bailey "inflation is actually way higher than official statistics indicate due to corporate skullduggery and/or bureaucratic ineptitude."
I'm confident Nate would agree with me that the official statistics, while of course imperfect, do a good job of measuring the price level. Given that, the disparity between the 3.2% inflation rate and public perception demands some explanation; historically those two things have been closely linked. Other explanations I find plausible are that people just have a pretty long time lag (i.e. "perception inflation" is more closely linked to the 24 or 36mo rate than the 12mo rate), and that today's population mostly has never experienced high inflation before so it was more of a psychological shock than it was in the past. But this factor seems like a good one to add to the list.
This fits with a slightly different paradox about the economy. People tell pollsters that the economy is terrible, but they are consuming like the economy is great.
https://open.substack.com/pub/noahberlatsky/p/americans-hate-the-economy-americans?r=uxe&utm_medium=ios&utm_campaign=post
One explanation that makes sense to me is that we are all still processing pandemic trauma. Not saying we all have PTSD, but collectively we are seeing all the glasses as half empty.
Yeah, Paul Krugman has been harping about that disconnect for a while too. In addition to the spending/polling divergence he notes there's a big difference between polling on *personal* economic circumstances vs. "the economy" with the former much more positive. So in Krugman's formulation everybody seems to think "bad things are happening in the economy...to somebody else."
_Some_ people are consuming like crazy. Consumer spending has been propped up for some time now by six figure earners. It's everyone else that's got problems.
>Other explanations I find plausible are that people just have a pretty long time lag<
I think this is undoubtedly true, and a big part of the answer to the question "Does Joe Biden win another term?" Assuming no obvious disasters for this White House (recession, a big spike in gas prices, etc) Biden probably gets reelected if, by this time next year, voters have adjusted to the post-pandemic price level. If they're still pining for 2019's nominal prices, Joe's probably a one-termer. At least that's how I see it.
(I also think this White House needs at least some help from falling mortgage rates; they don't need 3.5%, but they probably do need rates to fall by at least a point from where they are now.)
Yeah I've been thinking along those same lines. Ironically it kind of seems like the goldilocks scenario for Biden would be a little blip recession ASAP that spooks the Fed into dropping rates quite a bit followed by a strong recovery.
On the other hand even if views of the economy don't change that much next year, the issue's salience might. There will be a lot on the ballot, and if people's personal situations are good they might be inclined to vote those other issues instead of voting their bad econ vibes.
That's not how the Fed works with regards to recessions. The concern is that since the metrics that the Fed uses to decide when to cut are lagging measures that by the time they cut it will already be too late.
Seriously, do you read CNBC or Bloomberg?
Sigh, yes I do, but I pay attention to the facts they report, not the constant negativity bias. And throughout our conversations I've been going to FRED and actually looking at the numbers. And I've actually watched the Fed react to recessions, and it very much is the way they work.
https://fred.stlouisfed.org/series/FEDFUNDS
Just look at the rate around the shaded areas denoting recessions. Rate decreases do not lag the start of recessions.
You seem to base every comment on working backward from the conclusion "the economy is terrible" in whatever way you think is most expedient in the moment. You're using the data as a drunkard uses a lamppost: not for illumination, just for support.
What are you talking about? The idea behind a "soft landing" is to cut _before_ the country heads into recession.
In another comment you responded to posts from Fortune and other mainstream media outlets (including the WaPo) as "editorializing" about cuts in consumer spending, concerns that have been circulating in the financial press for months now as pandemic savings dry up. Do you think those articles are fake news or something?
30 year fixed rates have fallen for the last five weeks, dropping 57 bp. (https://fred.stlouisfed.org/series/MORTGAGE30US). Obviously, they're still much higher than they were two years ago but if the trend continues then I bet public angst declines a lot.
Yeah. I've noticed that. I hope the trend continues.
If inflation is so low why is the Fed keeping interest rates pegged at 5.25%? Maybe you should send a letter to Powell to let him know he can start cutting.
This x100
How is consumers choosing to spend extra on non-essential items (like McDonalds) evidence of economic distress? If anything it suggests Americans feel economically secure.
Seems like there's a weird hedonic treadmill thing occurring where people don't notice/become numb to their subtle upscaling of consumption, but are hyper-aware of the nominal amount of money going out the door.
Also their upscaling is not anchored to an absolute scale, but rather to their consumption class neighbors (who might or not be physically neighbors).
you are a first rate propagandist...suggesing we are all just morons but not saying so explicitly while crediting the White House and its propagandists in the media with the mental acuity of future AIs.... i suppose you think future AIs should imitate the @nytimes reporting or the New Yorker... For your info, I have kept spreadsheets on our expenses for years in consistent categories. I do it because a) I have multiple decades of analytical and forensic experience on Wall St so I am wired that way...to know the facts b) I am retired and while we are comfortable for now, I also know that if I live long enough, with a FED that thinks 2% degradation in my saviings value is ok, if I live long enough, I will the same overall shock that I do when I pay nearly $3 for a subway ride that cost me 5c when I was a kid. And I tell you point blank, COSTS MORE than it did 2-3, 4 years ago AND like everyone else, I KNOW it will never go down and am not fooled by a one month slightly lower rate of increase than the prior 12 mos, 2 years and 80 years. Save your BS for yourself.
To the degree your rant is coherent at all, it seems you will only be satisfied with *zero* inflation. A basic grasp of economics would tell you that's a bad thing to wish for, but even without that I would hope you could recognize that we haven't *ever* had zero inflation for an extended period, so maybe, just maybe it's not the right standard to hold a specific presidential administration to.
Also a great example of people's selective memory regarding prices vs. income. Yes, it is undoubtedly true that prices are much higher than they were in 1948 (when subway rides were last 5c), but the median household income has gone from $3200 to $75k in that period. Looking at the overall CPI, prices have increased about 12.5x since 1948, while income is up 25x. But let me guess: all your income increases over the course of your life were 100% because of your hard work and cleverness, nothing to do with the economy...but the price increases are 100% those dastardly elites using their corrupt Fed to steal your hard-earned money. And somehow this is all to be laid at Biden's feet.
Aggregate wage gains have not kept up with aggregate price increases since 2021 or so. That's the reason for all of the economic angst.
Give me a break.
CPI on 2023-10-01 was 117.1% of what it was on 2021-01-01.
Average hourly earnings, all workers, same dates: 113.6%
Average hourly earnings, nonsupervisory, same dates: 116.0%
Those tiny gaps are what you use to explain the public having more negative views of the economy than they had in the depths of the financial crisis recession? Sorry, but the mismatch of perception to reality is an actual thing. Polling shows the public thinks we have historically high unemployment for Pete's sake.
Sure, you’d be happy if your boss announced a 4 pct pay cut.
Of course that wouldn't make me happy, but that's pretty far from the point. First, 117.1 is 3% more than 113.6, not 4%. And for the vast bulk of workers, the <1% difference (117.1/116) for nonsupervisory is more pertinent. And that's over a *four year* period. So we're talking about annualized disparities of 1/4-3/4 of a percent.
Is that good? Well no, any reduction in real wages is clearly bad. But it's also almost certainly below the threshold where people would actually notice it, particularly in the context of "both numbers are going up" rather than "small but clear reduction in my paycheck." Certainly it's not at a scale that explains people having a more negative view of the economy than they did when unemployment was 8%. And it doesn't explain why people are directly answering polls saying inflation is higher than it is, wages are not growing when they are, and unemployment is near record highs when in real life it's near record lows. There really is a disconnect between economic perceptions and economic reality right now, and it really deserves study.
As an aside, don't forget the reduction in real wages is firmly in the rearview now. Using the last 12 months instead of 24, all-worker and unsupervisory-worker wages gained 4.1% and 4.4% respectively, while CPI only went up 3.2%. So workers have been beating inflation for at least a year. It's entirely possible that the public just takes a longer view than the econ stats we customarily look at. But one way or another, the current economic data just doesn't support the public sentiment data we have. It's a real thing.
Look, I think you may be having problems with the math so here's something in plain English:
https://www.cnbc.com/2023/09/07/wage-growth-vs-inflation-heres-when-workers-may-catch-up.html
https://www.statista.com/statistics/1351276/wage-growth-vs-inflation-us/#:~:text=U.S.%20inflation%20rate%20versus%20wage%20growth%202020%2D2023&text=The%20rate%20of%20inflation%20exceeded,wages%20grew%20by%205.2%20percent.
What's the cost of the new deluxe Western bacon burger now versus the cost if the same product had been introduced a few years ago?
Making an apples to apples comparison may be difficult but nobody seriously doubts that the costs of the raw ingredients have gone up, the cost of the labor has gone up, and therefore the cost of the finished product should be higher now.
I would argue that the increase in food costs has been so dramatic over the last few years that is has forced people who otherwise wouldn't care to sit up and take notice. And that group certainly doesn't include housewives and other individuals responsible for household shopping. Think of the coupon clipping mother who is undoubtedly laser focused on costs. What's her experience going to be these last few years?
I know exactly what I'm spending on fast food because I order the same thing every time and have for 20 years. The three items cost me $4.24 pre-scamdemic, but now cost me $6.58. And that's without an overpriced sugar water.
scamdemic?
Correct. Real inflation is much closer to 30% than 16% since 2020.
Based on what or whose data?
This reminds me of the argument I've read that people often complain about higher prices for houses without taking into account that houses today are bigger and offer more amenities than houses from decades ago. I've read similar arguments for car prices, where cars today are safer, more reliable, and have more features than cars from decades ago.
I think a lot of these arguments are really about the disappearance of super-low priced versions of products like housing or cars.
20 years ago, you could buy a car at the average price and get a 2003 average car. But you could also find a junker for $250, let's say 2SDs below average. Almost anyone who wanted a car could get one.
Today, you can buy a car at the average price and get a 2023 average car. You get a much better car! And it probably costs fewer work-hours at an average salary than the 2003 car.
But 'Cash for Clunkers' gutted the very bottom of the market.* It's coming back a bit now, but for a while, the used car market under the (I think) $2,000 price point or whatever the feds paid for used cards was nonexistent. If you needed an emergency car, or if you were 17 and kicked out of your house, no market existed.
It's similar for housing. My house is much nicer than a similarly priced house in 2003, or 1923, etc. However, there used to be a greater variety of 'bottom of the market' options, up to and including renting a one-bedroom apartment with eight other people who just got off the boat, or halfway houses for folks getting out of prison, or bunks in the back of a church. We've legislated most of these out of existence, and those that still exist tend to be run as non-profits serving specific populations that are exempted from standard housing requirements.
So while you're right, I do think the 'bottom' of many markets has been hollowed out in a way that causes hardship for some people.
*Which was kind of the point, because the clunkers had terrible gas mileage and were terrible for the environment.
Thisthisthis.
kk
This, exactly. It doesn't matter that now you can get a car for $20,000 that's ten times as good as the one you used to be able to get for $10,000 if you don't actually have $20,000 to buy it with and there are no $10,000 cars available. (numbers are completely made up)
That might be related to where you live. Here in CA, the houses in my town are 90 years old, 800 sq ft, and $700,000, up about 35% from two/three years ago.
Sounds like here in Melbourne: 60-year old houses, unrefurbished, going for close to a million, is quite standard. And that’s not the fancy suburbs either!
But for restaurant portion sizes over the last two years they have, if anything, shrunk.
I thought part of Nate's argument was that McD was upselling people like the guy from Idaho by selling them limited-time deluxe items, like a deluxe Double Quarter Pounder with Bacon and BBQ sauce.
If you normally go out to Texas Roadhouse for your Friday night meal with the family but are now going to McD's instead you may as well get the deluxe burger. It's still cheaper compared to the steak you're no longer getting.
Ok but that's in direct conflict with the pattern Nate is describing, right? Certainly at any given time many people are trading down and many people are trading up. But in the aggregate, if the population were trading down from TR to McD we would see spending growing more slowly than inflation.
No, because you need to look at spending broken out by income level. Spending had been propped up by six figure income earners for a while now. That is not reflective of what's been happening with the majority of the country.
That McD's "value meal" is the same price as (or more than) the steak you used to get, though. https://check-menus.com/texas-roadhouse-early-dining-menu
Cheaper than a six ounce steak but no sides or drink.
Correct. Paying more and getting less, especially noticeably in chains like Cheesecake Factory.
Great insight. I have some questions about the last part from a data perspective though.
1. The personal savings rate probably needs some kind of adjustment for demographics to be meaningful in this context. With boomers retiring in droves we should expect that number to be low right now. Does it still look low by historical standards if those effects are controlled?
2. You footnote the fact that the PCE-PCI chart has a weird starting date effect, but say the effect is still there measuring sept-2019 to sept-2023. That's fine, but we need a frame of reference since as you note PCE normally goes up more than PCI. So if it was 30% vs 20% over that period, what was it for say, 2014-2018? Given that the majority of the difference in your chart happens in *one* month out of the 24 months plotted, I feel like more investigation is needed on that one.
My hunch is that the big growth in difference happening in spring 2021 was (1) when people started getting their $2000 "Biden Bucks" check from the COVID relief act, and (2) when people first started to get the COVID vaccine and felt like they could go out and have fun again without fear of the virus. I know I was in a celebratory mood around then, with money burning a hole in my pocket, and suspect a lot of people felt the same way. Ofc new strains of the virus began appearing and mask mandates came back circa summer 2021, but for a few months there it was a lot of increases in consumption all around
Yeah I think that's clearly a big factor in the bump. If I wasn't so lazy I would pull, say, June 2021 to June 2023 and compare the PCE/PCI growth ratio to the 2-year periods from the decade or so before COVID to see if the ratios were similar. If that ratio for 2021-23 is way higher than those years, we might have a real effect there, but I'm skeptical that's what we'd see.
Yeah I never travelled so much for leisure as I did in 2021-22.
The savings rate had a big drop from Q2 to Q3 this year and real disposable income actually fell in Q3 despite the headline strong GDP growth (people spent more and borrowed more rather than saved). This is not good news. This is quarter to quarter data and has nothing to do with boomer retirements. On the other hand it is only one quarter of data. Let’s see how things look in Q4. A lot of the econ data is squirrelly due to Covid-related seasonal distortions
Good points, some things to keep an eye on there. Thanks!
Doesn’t the low savings rate have to do with spending down excessive savings acquired from stimulus during the pandemic?
So, the Elizabeth Warren "inflation is just corporate greed" narrative has some truth to it...
On the other side, I wonder if a problem is that we're getting less for our money. 5 years ago, that Big Mac meal would come with a larger well-maintained dining room, a play area, and visible employees to help with missing items. Now, it's an order from a kiosk, not much visible help, a tiny dining room with no play area, and a prompt for a tip.
There's also a fair amount of consumer greed at play. I can't begin to imagine the amount of calories in the average McDonald's order, but it's got to be well beyond recommended levels for a meal. It does seem like we are getting worse at impulse control as the years go on, and being in an actually strong economy isn't hindering that at all.
As I saw in another comment, I think there was a bit of a hedonistic backlash to the pandemic and the supply-chain disruptions that has metastasized into habits that are not sustainable. I've observed this in myself, and am working to break them.
Add on what Derek Thompson observed as the end of the millenial lifestule subsidy (https://www.theatlantic.com/newsletters/archive/2022/06/uber-ride-share-prices-high-inflation/661250/) as venture capital has dried up, and it's not surprising people are unhappy, regardless of what elected officials can do.
McDonald's has been around for generations. There has been a boom in fast food sales recently but I suspect that's because inflation is putting other, more expensive varieties of restaurant dining out of the reach of a lot of Americans.
There's not more corporate greed than 5 years ago. But in some cases companies are getting better at business
I think Nate's argument here is rather different than the greedflation theory. The problem with greedflation is that it lacks an explanation. Presumably firms have always been greedy, so why does it only manifest now?
Nate differs in saying that it is more like a technological innovation than a random increase in greed. New technologies (apps, kiosks, ubiquitous delivery, data analytics) give firms new tools to encourage spending.
In traditional econ, I think this is a straightforward value add. People are getting more and better stuff, and are willing to pay for it. But living through it, we see that people are stupid and lack willpower, so maybe the new options end up being kinda coercive.
I mean, on one hand, your framing of the situation is certainly reasonable and is a decent explanation for the perceptions being bandied about that would speak about a McD's value meal coming up to some crazy price increase.
However, on the other hand, the framing put out by those trying to take advantage of the message that inflation is out of control - "Look, here's a McD's value meal that use to be $7.50 that is now $14!", is pretty disingenuous given the facts as well if you add in the secondary information that it's a upsold burger that wasn't sold 3 years ago as well as delivery fees, etc.
The thing is, we're still in an economy that's performing well enough to where the fast food chains are able to get away with increasing prices and adding stuff and the people are still buying it because either they can afford the convenience or they really think the extras provide the value they want. That might change if we were in a worsening economy.
“They really think the extras provide the value they want.”
This is great point, and we see it with food at the grocery store too.
If I used to buy factory farmed chicken but I’ve since concluded that free range chicken tastes better, I’m going to start spending more on chicken. But that’s not inflation, that’s me trading up and deciding that an extra cost is worth it for incremental benefits.
Overall food quality in North America has gotten so much better than it was 20 or 30 years ago. And people have realized that better options are available and are migrating to higher end products as society has become richer. Plus especially post COVID, I’ve definitely seen (and experienced myself) a bit of “fuck it, life is short” where I pay a few extra bucks for some item I previously might not have.
So it’s not inherently a bad thing that people are spending more money. It goes back to my other comment on this article - you can’t assume preferences are static. If people want to spend more and feel like they’re deriving a benefit, it’s very different than if they don’t.
Your chicken example is a great example. From an economic standpoint, that's a premium good that's being purchased more often. That's good as the standard option still exists for those that don't want the premium option.
From a political standpoint, it's an easy message to say that "Look, chicken is now double the price!". It's tougher messaging to explain the premium option (in 2023) is being compared to the standard option (in 2019). That said, it's an important point to counter honestly.
I feel like the same thing happens with autos. Autos are so much more expensive than 25 years ago, yes. But they also are a ton safer, have multiple computers in them, and are way more reliable overall. It's also not apples to apples.
I have to wonder if people are using fast food more as an alternative to eating out at fancier, "sit down" restaurants. In other words it's the same downward slide where Target loses customers to Walmart which in turn loses customers to the dollar stores.
I don’t think they are. I work for a small producer that sells high end food directly to restaurants and specialty shops as well as grocery store chains and distributors (not fast food, though). Overall, my restaurant and specialty sales have been trending slowly back up for the past 3 years, to the point that they are *higher* volume than they were pre-pandemic. What’s dropped like a rock are the grocery chains and the distributors supplying them. That’s where I’ve seen the most squeeze too — pressure put on us producers to give discounts, backcharging of fees, etc.
My read (and I’m one *very* small producer, to be clear) has been that the affordable luxuries — a nice night out, really decent food, etc — is not taking a hit, but the commodity market (basic groceries, fast food, late-night binges) is in flux in a big way; prices are going up and people resent it.
Some of that is corporate greed; some is that, in the food industry for sure, it’s been Robbing Peter time for several decades and we are now entering the era of Paying Paul. Commodity food prices in the US have been kept artificially low since at least the 1970s; for a variety of reasons, that’s becoming less and less viable.
That’s not really Biden’s fault, of course; insofar as an presidential administration has any control over the economy, he certainly didn’t have control over this — he was just the poor sod to catch the hot potato. But I do agree pretending it isn’t there won’t fix that.
Employment for the top quintile of the economy was higher in summer of 2020 than prior to the pandemic. White collar professionals in that segment are doing fine but I doubt that supermarket check out clerks are able to enjoy fine dining.
I don't think that's an accurate description of what's happening in the economy. As Nate notes, spending is growing faster than inflation. That means people are buying more and/or fancier stuff. Substitution down the value chain like you describe would be much more consistent with an economy where nominal spending is in decline or at least growing more slowly than inflation.
Is that spending averaged out across the entire economy? From what I understand consumer spending has been propped up by the top third of the economy while the bottom half of earners are hammered by inflation.
Dunno where you're getting that idea, but in the recovery since the pandemic wage growth has actually been strongest at the bottom end of the scale. Arin Dube's estimate was the breakeven was around the 40th percentile, so the bottom 40% of earners actually had their wages grow faster than inflation, whereas the top 60% saw their real wages decline.
1. Growth in wages is irrelevant to the question of who is actually spending in the current economy.
2. Faster than core inflation? Or faster than growth in rent/fuel/food?
1. It's not irrelevant to that question, as spending generally follows income, and it's not obvious why this case would be abnormal in that regard. Moreover it's *definitely* relevant to the other half of your claim: that "the bottom half of earners are hammered by inflation." They have been less affected by inflation than upper-income people, inasmuch as their wages kept pace while higher incomes did not.
2. Yes. Core and headline inflation numbers weren't that different over the medium term (as expected...the whole reason to look at "core inflation" is that current core predicts future headline better than current headline does). So, wage growth at the bottom was faster than both of them.
I have not seen anything suggesting that spending in the economy is any more lopsided than it was in the recent pre-pandemic past (to be clear, it's been pretty lopsided for a while). If you have, I'm interested to see it.
Certainly people replaced dining experiences with delivery experiences during the pandemic (to some degree) and that has hung on (to some degree) now.
If you can spend $50 for two at Five Guys to have it delivered or go sit down at Chile's for $50, certainly many more people are now taking the Five Guys delivery in 2023 than 2019.
But that's not what I'm talking about. I am talking about people who can no longer afford Chile's and are doing Golden Corral.
And this deeply held faith will absolutely not be shaken by any data or analysis.
Why don't you actually try reading some of those links i posted?
I really don't understand why media people feel like they have to go this far to understand why people think the economy sucks, or why they think that it is counterintuitive that people think that. Housing affordability is at its lowest level in recorded history. What more do you need? Housing is necessary to sustain life and fewer people can afford it than ever before. The end. The only thing that is counterintuitive is that literally anyone would expect people to be happy because the GDP is up or whatever even though they can't afford to rent an apartment.
The number one thing we could do for the economy is to build more housing, lots more, but I'm not holding my breath.
Suddenly throwing a bunch of capital into the construction industry is going to create more inflationary pressure of its own.
Yes, definitely. That's the problem with infrastructure though (and I would consider housing to be infrastructure). You have inflation whenever demand outstrips supply, but sometimes increasing supply requires infrastructure investment. It just seems that housing costs are the biggest economic problem right now, certainly for all the younger generations, and I'm skeptical there's any way to address that other than increasing supply.
Yes, it's a wicked problem. To institute a mass home building campaign you would need to bring in large numbers of temporary workers, house them in cheap temporary accommodation and require most of their wages to be remitted home rather than spent in the US. Even then you'd be fuelling some amount of short-term inflation.
This article touched on this, but one huge underrated portion is that companies and industries tack on non-opt out fees to services.
Maybe this is purely anecdotal and not at all what’s going on, but I had to get my windshield replaced recently. I forgot the exact prices offered to me, but it was a couple hundred bucks. At the counter when it was time to pay, a new “recycling fee” charge was tacked on, which was somewhere over $50. This wasn’t reported to me online, and only appeared when I was going to pay.
Maybe the American economy has browbeaten me into just accepting these add on fees, but I doubt I could have opted out. (I genuinely didn’t ask, so if I could, that’s on me). But this trend of adding fees at the time of payment also has gotten worse and increased spending as well.
Hehe I had a surgery (kind of like carpal tunnel) a couple years ago where I carefully got a quote regarding it before agreeing because it was mostly out of pocket. Then when I get the bill there is a separate bill that wasn't part of the quote from the fucking room the surgery was in. So when I ask about this extra $1000 they are like "oh the quote didn't include the actual operating room itself, and that is a separate company so it wasn't part of our quote.
WTF did you think the surgery was going to be performed in an alley?
I would love to do this to a doctor someday. Sell them a car and then don't tell them it is missing the engine. If they complain just be like "hey engine sales are separate, sorry you thought they were part of the quote sucker!".
Yes it's been very hard to get a free market to function effectively in health care, in this country at least. There are lots of middlemen (to the point about the operating room) and it's not clear if they are providing any efficiencies or just multiplying costs. Presumably the market works well for veterinary care though, and so I feel like there are lessons to be found there. 🤷
Well, I think before I tried to copy the veterinary market where euthanasia is always available as a lower-cost option I just *might* consider looking at some other *human* healthcare systems that seem to work better than ours. It's not like we're bereft of examples.
Ha! Honestly hadn't been thinking about euthanasia when I posted that. Veterinary care has a lot of competition, and I don't think it's as hard to switch doctors or to get price quotes. But to your point (sort of), some people (not saying you did this) think, you can't put a price on life, or health, but, we do, when we're given the choice. I think in this country humans seldom consider cost when getting health care services, but a lot of health care is not life or death but just quality of life, some certainly more significant than other, and I'm not convinced all patients would consider a lot of it worth it if they could pocket the cash instead (which obviously you can't, but there has to be some way to answer the question, what's it worth to you). Anyway, yes we definitely need to do better. Our system works very well at the top, rather poorly at the bottom, and costs much more per person than any other wealthy country.
I wonder if that would be addressed now?
https://www.cms.gov/nosurprises/ending-surprise-medical-bills
It could be state law that they have to do this. (Although I doubt the price is fixed by the state.)
A portion of the increased spending is the ubiquitous tipping options that have been added as business transitioned to kiosks and expanded the breadth of business asking for such tips.
What’s missing from here is any acknowledgment of the possibility that people may *want* to be putting more stuff in their baskets.
Not necessarily fast food - I agree it’s annoying how quickly food delivery costs add up. But the idea that overall consumption is up and savings are down could just reflect changes in what people prefer to do with their money. I still don’t think we’re past the post-COVID “revenge spending” in a lot of areas.
Overall this explanation feels as half baked as the article it’s critiquing.
You can also call it The Deplorable, Flyover Country Citizens Theory. The people who don't have to care about whether prices go up a dollar on anything are the ones who are confused.
"The people who don't have to care about whether prices go up a dollar on anything are the ones who are confused."
I can't endorse this comment enough.
The number of journalists in that category, even at an outlet like the Post or the Times, is much smaller than the number of "flyover country citizens" who believe that all journalists are in that category.
CEO of Taco Bell spoke to our company, described the imp[act of electronic ordering. TB quickly introduced an app during the pandemic, objective was to minimize direct contact time at the window/counter. Unforeseen side effect - average sale per order for electronic orders was 15%+ higher than orders at window/counter. People ordered more food & higher priced options, maybe because the guy behind wasn't giving them the "hurry the hell up" glare?
You don’t have a citation or a white paper or anything for that do you? I’ve been looking for other IRL data that support this phenomenon!
No sorry. This was from an in-person presentation that the CEO of TB did for our company. He told the story, but there was no reference to any published information.
Drat!
I would also add in a couple of related factors: shrinkflation and adulteration.
1. Shrinkflation
The portion sizes are smaller, sometimes in not so sneaky ways. I ordered beef with broccoli at a Thai place a week ago. The to go container was the same size as normal but inside was a mere three pieces of beef on top of a mountain of broccoli.
2. Adulteration
I am pretty sure some of the local restaurants are putting sawdust in their food and I'm only half joking. I ordered all you can eat wings at Crapplebees recently and what you get is a lump of tasteless breading with a tiny nugget of pink slime in the middle.
CPI technically tries to adjust for shrinkflation etc., but I've heard differing accounts as to how well it tracks it.
My guess would be that if General Mills is decreasing the size of all their cereal boxes nationwide, CPI is almost definitely catching that. There is zero chance it's catching the local Chinese place modifying the ratio of meat-to-vegetables/starch. Other changes are somewhere in between.
Yeah that feels about right. I will say that the more I learn about how BLS does its thing, the more impressive it becomes. There are doubtless many imperfections but it seems pretty clear that the results are generally accurate. Among other things, rigorous alternative methods (e.g. Billion Prices Project) agree with them. And on the other side of that coin, so far every case I've heard for some wildly different rate of "real" inflation has been hackish bad-faith nonsense that was easily debunked.
I mostly agree with this -- the best bet is to measure what is measurable and make adjustments carefully. I'm not especially conspiratorial here. I wouldn't be surprised if there have been political pressures at times to deliver a lower CPI number, but regardless I think the process is still generally honest.
I think it's also fair to expect that even with a perfectly unbiased and well-designed effort, the imperfections in measurement are going to be heavily weighted towards the side of failing to fully capture subtle decreases in quality or quantity, for the very simple reason that merchants are incentivized to obfuscate those changes while publicizing any improvements they may make in quantity or quality.
For example, when the cola makers replaced cane sugar with HFCS, they never publicized it. Maybe I'm wrong, but I doubt that CPI made an adjustment -- and if they did, it seems they'd just have been making up a number. But now the cola makers sometimes sell versions with cane sugar. Those are, of course, specifically marked and priced at a premium ("Pepsi Throwback").
And it's almost certainly the case that the number of attempts to get away with shrinkflation have increased over the last several years. So it's probably a fair bet that the amount of undermeasurement has also increased. But like you, I doubt anyone who thinks he can really quantify it.
I have no idea if Crapplebees is still doing the all you can eat wings deal but I suggest checking it out if it's still available. The correct comparison I think would be what would a similar deal look like a few years ago versus today, where the food being offered is borderline inedible.
In fairness, I think those are "boneless wings", which aren't wings in any sense of the word-- and it should probably be illegal to call them such.
I've only had "boneless wings" once, maybe 5 years ago, at a local wings place. They were half off that night and I was misled to think they were actually wings. They were also really gross, I only ate two of them.
If Applebee's had transitioned from all-you-can-eat real wings to all you can eat "boneless wings", that would be a strong point. But I don't know that they ever had a deal like this for real wings.
I think the McDonald's situation is more extreme than you posit, because prices seem to vary greatly depending on the region and exact location of the store. I recently paid $4.89 at a McDonald's on 1-95 in Connecticut for a medium order of fries; a combo meal of a grilled chicken sandwich, medium fries and a medium drink cost $16.00. (Obviously I hadn't looked closely at the menu.) Those are bonkers prices for that food, and you could get actual real food at that price point—a Chipotle burrito, for example. At a McDonald's in New York a couple days ago, I paid $8.50 for a medium coffee and a medium fries. Yes, I'm a glutton for punishment--but these prices have certainly made me think twice about going to McDonald's, and I don't see how they're sustainable.
@lainaminute did a great piece on this in LA county recently; essentially the average cost of an order at McD’s is a worthless metric because individual stores can price their menu however they want to (with some exceptions).
It creates some interesting questions, ones answered at a much more local level, all weighted evenly.
One difference is you might have found a deal ordering thru their app, or using a coupon. Walk ups or people who don’t have a smartphone or who don’t want to submit to tracking pay the published price.
McD's, probably because of it's size and it's massive data analytics organization
(see https://medium.com/@nuhaaltoraby91/how-mcdonalds-utilized-big-data-c6016e8b46b5#)
is probably the most egregious example of this. You'll see prices are now hidden or confusing (mixed with combo prices and very small sandwich prices).
The value menu has shrunk considerably. Some known menu items (like Ice Cream or Happy Meals) aren't listed at all.
Nate, I would be very interested to hear your take on the proposition that economic data since covid has been much less reliable, mostly because of response rates/bias in surveys but perhaps for other reasons too? I'd like to say I trust the Fed to figure this all out but since I don't, I'd like to know what light you could shed on the situation. Which data is the most trustworthy, and what grains of salt should we be taking with the rest of it. And this overlaps some (or it should) with today's column, in that we're asking what's the best way to measure what's going on. Thank you as always!
Consumers save less when they feel good about the economy and save more when they are concerned. You see this in the FRED graph: savings rate goes up during and shortly after recessions (gray bands) and falls between recessions. Given this, I’m not sure I buy the low savings rate as an explanation for economic pessimism.
It seems totally plausible that people cut spending on travel and in-person services (massage or mani-pedi stuff) during 2020 and some part of 2021, switched over to more online shopping and ordering food in, and finally went back to traveling, driving, body care, while maintaining their upgraded shopping habits.
People have an incredible ability to get on the hedonic treadmill and get used to anything. In this case, shopping more in 2020 without ever dialing it back.