What bicycle prices tell us about today’s inflation numbers

What bicycle prices tell us about today’s inflation numbers

In a sign that inflation may be stickier than once thought, Federal Reserve Chairman, Jerome Powell, no longer describes it as ‘transitory’. And if you’ve been shopping for a bicycle of late, you’d probably agree. This is highlighted in a recent story by The Wall Street Journal, which gives a fascinating insight into the impact on prices of pandemic-inspired goods demand, and supply chain bottlenecks.

Now, the bicycle industry is one that a few of us at Montgomery have a passionate connection to, being roadies or mountain bikers for decades.

At the beginning of the pandemic, with populations locked out from their usual work routine, bicycles were in hot demand. I can recall, when restrictions eased slightly, driving past a 99bikes store to see, for the first time in my life, an enormous queue, 50 deep, of mums, dads and their kids waiting to purchase bikes or bicycle accessories.

Unable to spend on travel, restaurants or the cinema, consumers turned their JobKeeper-boosted incomes to goods, and bike sales, among other products, surged.

The WSJ noted one manufacturer that usually sells 200,000 bikes per annum, sold 250,000 in 2020 and could have sold 125,000 more if Asian based manufacturers had been able to increase production.

Citing a Texas bicycle retailer, the WSJ noted sales of 13,400 bikes in 2019, 18,200 in 2020 and an estimated 22,000 this year.

That heightened demand had burning coals heaped on top in the form of supply chain bottlenecks, producing delays, higher manufacturing costs, and ultimately, higher prices.

Despite the passage now of almost two years, the issues confronting manufacturers, wholesalers, retails and consumers hasn’t eased. And this is the important point for inflation watchers. As the WSJ notes: “Today’s rampant demand and strangled supply are already pushing next year’s prices higher.”

Citing a UK based e-bike manufacturer and distributor, the WSJ quoted its owner as suggesting inflation may not be “transitory”. The bicycle manufacturer made the observation that prices aren’t coming down next year. That’s not the same however as even higher inflation than this year. That simply means deflation won’t occur. Prices can rise next year but if those price rises aren’t as rapid or as great as this year, it is tantamount to disinflation. Disinflation is a supporting environment for innovative companies, growth stocks and businesses with pricing power.

Pricing power is what this blog is really about. More on that in a moment.

Another major cycling house of brands – Alta Cycling Group – based in Washington, notes: “We don’t see any improvement for 2022, for sure. We’re going to be in the same boat that we’ve been in since the end of the summer 2020, when there’s not enough supply to meet demand”.

Components and shipping costs have all risen, and along with competition between manufacturers for common parts, the cost of producing a single bike has risen by as much as 25 per cent compared to pre-pandemic costs.

Seatposts and cranks are up 20 per cent in 12 months, handlebars 11 per cent, brake components 14 per cent, bicycle chains and wheels 17 per cent, reflectors 50 per cent and perhaps the most startling, the price of some circuit boards for e-bikes, which once cost less than two Euro have jumped to 30 to 40 Euro each. Meanwhile the container used to ship the parts has risen in price by US$4000 to $20,000.

That precise container price increase was also confirmed for me this week during a conversation with an Australian Christmas hamper importer.

The bigger story

The WSJ notes the owner of the UK based e-bike manufacturer is satisfied that raising prices, at least to cover the increased costs, is the right strategy. But not all manufacturers are merely covering costs.

Indeed, according to another WSJ article, citing Factset data, two-thirds of large publicly traded US corporations are reporting “much” higher profit margins than they had in 2019. That means their revenues are rising more than their cost base. In effect, many corporations are using inflation as an excuse to raise prices and make larger profits, worsening the inflation problem and lower the quality of living for their customers.

In recent earnings calls, some larger US retailers have unwittingly boasted about their improved margins, literally confirming they are advancing prices at a faster rate than their costs!

Walmart, posted better-than-expected earnings by offering fewer discounts to shoppers.  Colgate-Palmolive said: “What we are very good at is pricing”, adding “Whether it’s foreign exchange inflation or raw and packing material inflation, we have found ways over time to recover that in our margin line.” Back in October, Kroger said: “We’ve been very comfortable with our ability to pass on the increases that we’ve seen at this point”, adding, “And we would expect that to continue to be the case.”

Former US Labor Secretary Robert Reich said: “Corporations are using the excuse of inflation to raise prices and make fatter profits”, calling the phenomenon a “symptom” of “the economic concentration of the American economy in the hands of a relative few corporate giants with the power to raise prices.”

With that in mind, the US Federal Trade Commission (FTC), charged with protecting America’s consumers, last week launched an investigation into profiteering from the supply chain disruption. You can see the FTC’s request for information here.

The FTC wants to know if big firms cause supply disruptions, manipulate them or profit from them. And, to find out, the FTC has sent Walmart, Amazon, Kroger, Procter & Gamble, Tyson Foods, Kraft Heinz, C&S Wholesale Grocers, Associated Wholesale Grocers and McLane, very serious demands for data akin to subpoenas.

The letter to retailers, for example, reads: “The Commission is seeking information concerning the sources of supply chain disruptions and the impact of such disruptions on competition in consumer goods and retail markets. The Special Report will assist the Commission in conducting a study of these supply chain issues.”

While seemingly a simple information-gathering exercise, it is in fact the first step to preparing reports to assist and influencing Congress and US states to implement legislation to restructure markets. The FTC can also pursue such policy goals directly.

I am an investor, so it follows I want to own companies increasing their profits, but I am far less comfortable supporting those who rip off my neighbours by taking advantage of already difficult, and at times heartbreaking, circumstances. Companies must be careful they don’t abuse their market power. Calling out those that brag about abnormal margin improvements should also be the goal of a responsible citizen.

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Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.