There is a moral to this week’s stories that Brompton, the UK maker of expensive folding bicycles, is likely to raise its prices by 10 per cent this year, while LG, the South Korean electronics group, will stop producing mobile phones. Companies that can charge more are doing so; those that cannot are in trouble.
Brompton is among many enterprises now hoping to pass on rising prices for raw materials, such as aluminium and steel, as well as much higher rates for transporting them around the world (not helped by the Ever Given container vessel getting stuck in the Suez Canal). The costs have to be borne by someone, and that someone is us.
We have become so used to paying low prices for televisions, toys and furniture, manufactured in China and across Asia for global consumers, that the headlines come as a surprise. Air conditioners are more expensive in India; scarce lumber is adding to the cost of construction in the US; even toilet paper is getting pricier.
Higher prices are going to be part of our lives for a while — not only for real estate, university education and medical treatment, but for consumer durables. Many of the goods that have flowed easily for decades from global supply chains into shops and warehouses operated by Amazon and others are going to become more expensive.
Perhaps that is fine. I cannot be the only one to harbour guilty feelings that I purchase too much stuff on impulse — that it is easier to click a button to order a new product to my door than to fix, or even to find, the old one. Stiffer prices are one way to introduce some needed friction to the consumer habit.
But expensive services will not get cheaper to make up for cheap goods becoming pricier. The cost of US college tuition rose by 170 per cent in 20 years to last December (more than triple the 55 per cent rise in the consumer price index) while childcare and nursery fees rose by 106 per cent, according to data compiled by Mark Perry of the American Enterprise Institute.
The price of televisions meanwhile fell by 97 per cent, that of toys by 73 per cent and that of computer software by 70 per cent. It is no mystery — consumer electronics companies are exposed to the full force of global competition and supply chains while Harvard, Princeton and the local nursery school are not. Parents are all too ready to overpay for their children’s prospects.
A similar story of globalisation and bargain prices has played out elsewhere. A Cambridge Econometrics study found there was a “steep and continuous decline” in the inflation-adjusted prices of clothing and footwear in France, the UK and the US between the 1970s and 2015, thanks to increased cross-border trade and investment.
This long decline has now hit a bump. It could be temporary: although LG has retreated from making mobile phones, having lost nearly $4.5bn over the past five years, its rival Samsung Electronics projects a 45 per cent rise in first-quarter profits on strong sales of phones. Supply chains are still working and high demand, fuelled by the $1.9tn US stimulus, could make them work faster.
Jay Powell, chair of the US Federal Reserve, has suggested that the supply shocks are temporary and a recovery in economic activity as the US emerges from the pandemic will only have a “transient” inflationary impact. More plastics, aluminium and computer chips will ease the pain.
But prices may not fall again easily: other obstacles lie in the way of a return to goods constantly getting cheaper. One reason for the growth in home building costs in the US is that several raw materials, including steel, aluminium and lumber face import duties and tariffs. Some of these were imposed by Donald Trump when he was president on the grounds of national security.
Global trade has suffered many stresses, from US tension with China over security and human rights, to vaccine nationalism and Brexit. The Cambridge study suggested that UK membership of the EU single market encouraged car production and helped it to match the “pace of real price reductions observed elsewhere in the world”. That is now history.
Voters had their reasons to want to restrict global supply chains, which had not only reduced the prices of consumer durables, but also allowed many jobs to move overseas. But they are experiencing the impact when shopping at home: it costs more, and may keep doing so.
Some will think this justified, but it is going to strain those who cannot afford it. The fastest price rises of the past two decades have been in luxury goods, or services aimed at the affluent, such as private education and healthcare. It is nice for them that televisions are cheap, but not necessary.
Inflation in consumer durables and traded goods will eat into more of the budgets of people on lower incomes, who lack the cushion of wealth. It has not occurred for so long that it will come as a shock — appliances that were once updated constantly will have to be kept instead.
Those able to pay £3,000 for a Brompton may not mind if the price goes up. For others, inflation will be harder.