The real reason prices aren’t coming down

New inflation numbers were released Wednesday. Tl;dr: While the rate of price increases is slowing down, it remains stubbornly high.

The most common traditional explanation is an imbalance between supply and demand — “too much money chasing after too few goods,” as Milton Friedman put it. Most economists say that the supply chain disruptions contribute as well. But supply chain problems have eased in recent months, easing some supply concerns, and the Federal Reserve has been steadily raising interest rates, slowing job growth as a way to balance out the demand part of the equation. So why are prices still so high?

Tracy Alloway, a Bloomberg journalist and co-host of the financial podcast Odd Lots, thinks the answer may be, in part, the fact that many companies are increasingly turning to a strategy known as “price over volume.”

Translate that into plain English and you get something like “chasing fat profits.”

“So you’re selling fewer products, but you’re selling them at higher prices,” Alloway told Today, Explained co-host Noel King on a recent episode of the show. “It’s a viable strategy in the current environment.”

Today, Explained spoke to Alloway about this corporate strategy and the reasoning they use to justify price hikes to their customers in the first place, a phenomenon she’s dubbed “excuseflation.”

Below is an excerpt of the conversation, edited for length and clarity. There’s much more in the full podcast, so find Today, Explained on Apple Podcasts, Spotify, Stitcher, or wherever you listen.

You recently identified a phenomenon that you call “excuseflation.” Tell me what it means.

I think a lot of people at this point have heard about this idea that companies, you know, maybe they’re taking advantage of the current environment in order to raise prices and really gouging their customers.

The thing about excuseflation is it’s sort of grounded in truth. It’s the idea that companies are using these once-in-a-lifetime disruptions. Think about the supply chain hiccups that we’ve had. Think about the Ukraine-Russia war. And they’re using those one-off disruptions as an excuse to raise prices. And that sounds fair enough. You know, companies, they have expenses. If their input costs go up, maybe it makes sense for them to pass some of those on to customers. But where it starts to become insidious is when they’re raising prices so much that they’re seeing their profits go up quite substantially as well.

Can you give me an example of something that has been excuseflated?

Sure. So one of my favorite examples, because, you know, I love these personally, but chicken wings. Let’s talk about chicken wings and Wingstop. Wingstop is a very large purveyor of very delicious chicken wings. And what they’ve been saying on their earnings calls is that they have been raising their prices for their delicious chicken wings. And the reason they’ve been doing that is because the wholesale cost of your basic chicken wing went up quite a lot during the pandemic. We had a lot of disruptions at various farms, chicken farms with labor shortages and things like that. So it made sense that chicken wing prices went up and the company started passing those on to consumers.

The issue now, though, is that we have seen a substantial drop in chicken wing prices. And yet the company isn’t saying that it’s going to start dropping its prices. What it’s discovered, much like a lot of other businesses at the moment, is that actually this strategy of making up what you lose in sales volume with higher prices, so you’re selling fewer products, but you’re selling them at higher prices, [is] a viable strategy in the current environment, and it’s working for a lot of companies because profit margins are up.

Listen, you are an economics reporter. You see what’s happening. You are still buying chicken wings. Why are you not furious? Why have you not put your foot down?

First of all, let me say that my personal price elasticity when it comes to chicken wings is probably infinite. But, you know, I will pay whatever it takes to eat Buffalo wings.

Wingstop is listening!

We spoke to the owner of a bakery over in Chicago. And, you know, I think there’s a tendency when you think about things like greedflation or excuseflation, you think about these big corporations, these really sophisticated corporations that are, you know, formulating their pricing strategies and how to get the most out of customers. But this is a phenomenon that also is endemic in smaller and midsize businesses. And this baker in Chicago kind of laid it out for us. He said:

Whether it’s rye flour or bird flu, that impacts eggs when it makes national news just running a business, it’s an opportunity to increase the prices without getting a whole bunch of complaining from the customers. It’s not that we’re out there price gouging, but, you know, timing can be everything. —Ken Jarosch, owner of Jarosch bakery, as heard on Odd Lots

Shouldn’t competition push prices down? If I’m a business owner, I’m going to let consumers know that I can get them stuff much cheaper than the other guys who have excuseflated everything. Shouldn’t that be happening?

This is really the key thing about excuseflation and where it differs a little bit from greedflation. If a company starts raising its prices just because it can, then in theory, according to the basic rules of capitalism and economics, someone should come in and undercut them and steal all their business away. But the thing about excuseflation is it allows companies to raise prices all at the same time and all together.

The economist Isabella Weber, she basically says what it does is it gives companies de facto monopoly power. So you think about the reason that we tend not to like monopolies as consumers. We want, you know, a vibrant landscape of lots of smaller businesses that are all competing with each other so that we get a better value for our money. What happens when you have an industry-wide event that gives a group of businesses an excuse to raise prices: They are all effectively, not officially, but effectively acting as a monopoly. They can all say, well, you know, it’s bird flu, so we’re all going to raise the prices of our eggs.

When it comes to specific company examples, you know, Pepsi has been pushing their prices higher for a while. And you would think that, well, customers can just buy Coke instead, but actually Coke is pretty much doing the same thing. And so you end up having these industries who are all acting together. And that means that there’s very little incentive for them to start lowering prices because they’re not seeing that competitive pressure.

We tend to think of monopoly power as this, you know, kind of static thing. So you might have one big company that dominates an industry, and that’s a classic monopoly. Consumers don’t have a lot of other options. But, in fact, monopoly power can be a fluid and temporary thing. So when you see a supply bottleneck or when you see an industry-wide disruption, it can lead to this situation where companies all start acting very similarly. They all start doing the same thing.

It’s almost, you know, I hesitate to use these words because they have legal connotations, but it’s almost like a de facto cartel, right? Everyone decides to raise their prices all at once because whatever crucial component or input cost is going up. That leads to an automatic monopoly. It feels the same to a consumer who finds that, actually, they don’t have a lot of options because one group of businesses is raising their prices all together, all at the same time.