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This week, we’re taking a dive into the conflating issues of semiconductors and inflation. Links to follow.
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It’s too early for any book to have the slightest clue about the pandemic – The Conservative Institute.
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Inflation, semiconductors, and the complexity of the US economy
I want to start by telling a short economic story that’s happening right now. It’s not technically an inflation story, but it’s causing price inflation.
As I’ve written in the past, one of the critical parts of the economy is the semiconductor market. Semiconductors are small electronic devices that are essentially necessary for all modern technology. For the past 5-10 years, national security and technology futurists have warned we could experience a shortage of these devices as their demand rose. It could cripple the technology part of our economy. We’re at that moment right now, and we’re trying to fix it.
For example, Congress is in the process of passing a piece of bipartisan legislation on boosting the US manufacturing and supply of semiconductors. Everyone understands the risks, both economically and on a national security basis — and I’d add, were I there, I’d vote for that legislation because it is necessary. Here’s how it’s impacting the car market right now.
Semiconductors get used in the manufacturing of new cars. However, the shortage has forced auto manufacturers everywhere to pause and idle production lines while waiting for more chips to arrive. All automakers in the United States and internationally have had to halt production — which impacts those workers — as everyone waits for the shortage to get fixed. The problem is that there’s a ton of demand from consumers to purchase cars, but there are no new cars to buy.
With no new cars, consumers are turning to used cars. The result is that used car prices are surging. Here’s some local reporting from Florida to give you some flavor:
“Your used car is worth more now than it was four months ago,” said Bill Pace, a car dealer.
“Over the last 90 days, used car prices have increased by about 10 percent,” said auto dealer Mike Offutt.
How about here in South Florida?
“Right now, the way the market is, they will get a lot of money for their vehicle,” said Nestor Luna, General Manager of Midway Ford in Miami.
Analyzing 1.2 million used car sales, from April 2020 to April 2021, the average used car increased 16.8% or $3,926.
Let’s compare the year-to-year cost of the average used car. In April 2020, it was $23,371.00 and in April of 2021, it rose to $27,297.00.
“The demand because of lack of new cars is switching over to used, and the used car value has gone up last year 17%,” said Luna.
That point is backed up by inflation data and research. “In April, the average price of a used car soared to an all-time high of $25,463, according to research firm J.D. Power. That’s more than $2,000 higher than the average used car price was in April of 2020, and it was the first time the average price of a used car exceeded $25,000.”
It doesn’t end there, though. It’s not just more expensive to purchase a car, but now it’s more costly to rent a car. From March to April alone, the price to rent a vehicle skyrocketed by 12.1%. There are shortages at car rental places to such an extent that consumer agencies warn of car rental scammers. There are local media stories of families having traumatic vacation experiences because they can’t get a rental car.
The demand is so high that new services have started popping up where people are renting out their own cars — AirBnB style — to let strangers drive them to fill the gap. One woman in Orlando made so much money doing this, she now rents out 13 cars and is constantly booked. New app companies are spreading their wings.
These are just consumers, though. Individuals like you and me. There are issues on the business-consumer side of the spectrum too. You and I may only need a car or truck, but corporations must invest in vehicle fleets. Suppose you’re a transportation company that relies on trucks or even ride-sharing companies like Uber or Lyft (which are experiencing car/driver shortages). In that case, this hurts your bottom line and forces you to raise prices to deal with all the increased costs, just with locating new replacement vehicles.
Remember where I started? I said this was not an inflation story. It’s a semiconductor shortage. But I want you to realize how many downstream effects we’re dealing with from one issue in semiconductors. We went from one deficit in an electronic device to people renting out their own cars, and any consumer product dependent on transportation services going up in price to account for all these new transportation expenses. And it’s all from the shortage of one essential product. That product is causing pricing inflation in a variety of different ways, seen and unseen.
One product. Not even a whole commodity, it’s a component of countless other products (recall, for example, the classic story “I, Pencil.”). The entire economy is like that. There are individual products like that across the whole economy, scattered everywhere, impacting industries. The economy is organic. It’s not a machine. The downstream impacts of any decision cannot get fully captured because the implications and ripples of economic choices are constantly fluctuating.
Semiconductors aren’t an inflation story, though they’re pushing prices. But with inflation continuing to surge, everything is becoming an inflation story. Storylines like semiconductors are flowing into the inflation narrative, driving it further.
The monthly inflation report came out this past week, and it said the following:
Over the last 12 months, the all items index increased 5.0 percent before seasonal adjustment; this was the largest 12-month increase since a 5.4-percent increase for the period ending August 2008.
The all items index rose 5.0 percent for the 12 months ending May; it has been trending up every month since January, when the 12-month change was 1.4 percent. The index for all items less food and energy rose 3.8 percent over the last 12-months, the largest 12-month increase since the period ending June 1992. The energy index rose 28.5 percent over the last 12-months, and the food index increased 2.2 percent.
The WSJ added this tidbit in its reporting, “Some 48% of small businesses indicated that they raised average selling prices in May, the highest share since 1981, according to a survey conducted by the National Federation of Independent Business, a trade association.”
I referenced a couple of weeks ago that I was shocked I was in close agreement with former Obama economic advisor Lawrence Summers. This week, another former Obama administration official, Steven Rattner, tweeted similar sentiments. He said:
The core CPI jumped again in May, by 3.8% year-over-year, more than the expected 3.5%. By this measure, inflation looks to be accelerating.
Yes, some of recent inflation is catch up after sluggish price increases during pandemic. But even on that basis, inflation is accelerating rapidly and prices are above trend. We need to trim stimulus now!
What universe is this? You should mark this moment in time because conservatives and Obama administration liberals agree that stimulus is terrible right now. Senate Minority Leader Mitch McConnell tweeted, “Consumer prices are rising faster than they have since the depths of the 2008 recession. The data reinforce what American families are experiencing firsthand: the Biden Administration’s partisan spending has blunted our nation’s economic recovery.”
Everyone is in considerable agreement.
This understanding is why it’s bizarre that we’re getting more negotiations and proposals for more government spending. The so-called “Gang of 10,” a group of 10 senators, five from each party, claimed to have an agreement to present to Biden for further negotiations on an infrastructure spending plan.
I don’t know how you make a case for more spending right now when every month since January has shown increased inflation. And while many factors are crisscrossing to create this inflation moment, juicing demand by shooting money into the system like the Democrats COVID-19 relief bill and how any infrastructure bill would do seems like pure madness to me.
It’s not hard to imagine the press statements from a Biden administration. “We aren’t doing reckless stimulus spending during an inflationary moment. We’re just doing smart infrastructure on things that need it. Roads and bridges. That won’t impact inflation.”
But I want you to think about that. Watch something simple, like the semiconductor, and watch the ripple effects and how industries and people get impacted downstream. And then factor in what is pushing inflation right now: the end of the pandemic. The number of factors and variables involved here is massive.
I’ve said this multiple times, and I’ll keep saying it: we do not understand the various ways our economy is getting reshaped by the end of the pandemic. Businesses and consumer behavior are nothing close to normal now, and everyone is struggling to figure out what comes next. The pandemic makes everything harder to understand and see clearly from a data standpoint because you can’t trust you’re getting good information.
We went from no inflation worries in December to a full-blown inflation issue by March. Now it’s blooming into a potential crisis as people feel the heat on higher prices across the board. Everything is more expensive, and that weakens the spending and wage-earning power of individual Americans.
Pretending that the government can make intelligent infrastructure decisions when we don’t know how the post-pandemic economy will shake out is the height of hubris. It’s not even an educated guess because we’ve never done anything like this in US history.
There’s no economic reason for infrastructure spending. It’s purely a political desire. Republicans are in the right to oppose spending. It makes little sense for Senators like Romney to push more spending to get a compromise when the intelligent choice is to avoid any more spending until post-pandemic life settles out. The only spending I support comes from that semiconductor legislation, and I support that more on a national security angle than anything. We have to get ahead of that issue no matter the cost, even if that does mean eating more inflation.
(If you’re curious what got me to notice semiconductors as an issue, see the novel Ghost Fleet. It was a creative attempt from the Defense Department to imagine the next World War and how it’d get fought.)
In the meantime, the reality is more spending. This WSJ headline says it all: “From Beans to Burgers, Food Is Getting More Expensive: Chipotle, Shake Shack and Piggly Wiggly are all raising prices to cover higher costs.” Hopefully, some sanity overtakes DC so we can ride out this inflationary surge.
Links of the week
Journalists Against Truth – Noah Rothman, Commentary Magazine
Bogus Social Media Outrage Is Making Authors Change Lines in Their Books Now: The silly idea that a fictional character’s statements reflect an author’s actual beliefs is spreading. – Laura Miller, Slate
We Can’t Trust the IRS – Charles C. W. Cooke, National Review
How Corporatization Killed Classics – The Washington Free Beacon
Twitter Thread(s) of the week
Satire of the week
7 Family Games You Didn’t Know Were Actually Designed By Satan – The Babylon Bee
Thanks for reading!