Inflation Explained by Bicycles
Is inflation really due to supply chains? Maybe the bicycle industry holds the answer
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I am sure you have heard that the annual inflation rate in the U.S. accelerated to 7.5% this week, the highest it’s been since 1982.
If you find the explanations for record-high once-in-a-generation levels of inflation unsatisfying you’re not alone. Mot articles in the business press typically gloss over the root causes and just say something to the effect of, “inflation is due to supply chain disruptions and pent-up consumer demand for goods.”
This lack of detail opens the door to wild speculation from anonymous Twitter finance gurus or other permabears whose explanation for all that is wrong in the world is due solely to policy mistakes by the Federal Reserve Bank. Their explanation for just about everything from, stubbing their toe, to a lack of tasty options at their local food court is, “The Fed has debased the Dollar, flooding the system with too much currency and that has reduced the Dollars buying power. Zimbabwe here we come.” Sure, that plays some part in what is happening, but it’s not the full explanation.
While blaming the Fed may be popular and satisfying for many reasons, it’s not the primary cause for inflation. So what is? Maybe what’s happened in the bicycle industry is illustrative to understand what drove inflation to record levels.
Bicycles are a pandemic favorite and a supply chain fiasco
We all know that during the pandemic bicycle riding experienced a renaissance. But just how popular was it?
During the pandemic peak, bicycle popularity soared:
In 2021 the bicycles category became a $5.3 billion business, up 65% in the 12 months ending July 2021 compared to two years ago in 2019.
Bike accessories accounted for $903 million in revenue and grew 36%
Bike parts reached $1.1 billion, up 31%
Helmets, shoes, and gloves hit $445 million, up 20%
And just to prove that this popularity was broad-based, and not just fitness fanatics, the biggest increases were in entry-level, casual, or transportation-focused models:
Sales of mountain bikes increased 70%
Children’s bikes rose 57%
E-bikes grew by a whopping 240%
What’s important to understand is that prior to the pandemic the bicycle industry was a sleepy, low to no growth area, no one cared about it. Manufacturing is highly consolidated to just a few locations in Asia. Most carbon frames are made in Taiwan and most components (chains, cogs, pedals, etc.) are made in a few factories in Japan. Sales were steady for years. No one saw the demand tripling overnight.
Given the real constraints on manufacturing, you can’t spin up a carbon fiber frame building plant overnight, this surge in demand for bicycles could only have one effect, an increase in prices. Stores were able to sell any bike on hand for full price, or more. Discounts and sales were eliminated. Competition for scarce parts doubled prices for everything from handlebars to helmets (go look on Amazon at the price of a new bicycle chain?)
Services vs. hard goods, one is more scalable than the other
Now compare this effect to a restaurant or service the see a surge in demand. A restaurant can just put more tables outside, a barber can hire more staff and easily take on more customers. Most service-based businesses are easily scalable and this reduces the pressure to increase prices when demand surges.
But when the demand for hard goods like bicycles increases from, oh maybe from a global lockdown? And you give out free money? And you crush all demand for services by limiting capacity indoors? People start to buy lots and lots of stuff. Demand for hard goods skyrockets, and so does inflation. Manufacturing capacity has very little elasticity when compared to services. There is only one option, prices go up solely from the competition.
When will inflation normalize?
The bicycle industry has no plans to increase production capacity significantly. They have very little confidence demand will be sustained. Early bicycle sales data seems to indicate this, sales of 12-inch children’s bicycles have decreased by -6% from 2020 levels. Besides, how many refrigerators, washing machines, or new bicycles does one need? My best guess is that inflation will start to normalize by summer when people start to go out in public and spend on services.
After two years of riding a Peloton in my bedroom, I know I am ready to get outside and spend time socializing at the bar, and I don’t even drink.
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I think another part of the reason for inflation is corporate concentration. Most industries are dominated by a few large companies so they have the power to raise prices at will and they are using the pandemic as an excuse. See the article below.