Via ConvergEx's Nicholas Colas,
While the world’s central banks struggle with deflation, millennials (those born between 1980 – 2000) are busy creating a world where persistently lower prices will be an economic cornerstone. “A feature, not a bug,” as they say in the tech world.
The immediate reason for that is simple: our cohort got stuck with educational hyperinflation, something economists miss when they look at the headline numbers. Education is only 6% of the CPI basket. For millennials, that number can easily exceed 20% because of student loans. We are therefore turning to a new tech-enabled service economy to help us make ends meet, and the majority of these new services are profoundly “Disruptive” to old business models.
“Disruption” is often code for “deflation”, since more taxis (Uber), hotel rooms (Airbnb), food delivery (too many examples to mention) means more price competition. And when the next wave of disruption comes along to put the current crop of “Disruptors” out of business, we’ll switch to them. Deflation will be permanent, and we’re OK with that. And when my cohort runs the Fed, or the ECB, or the BoJ, we will be unlikely to care if prices decline. We may even consider it the sign of a successful economy that serves its citizens well.
Note from Nick: Baby boomers know a lot about inflation. We came of age in the 1970s, when food and gas prices rose so quickly that it was easy to come up short on cash at the checkout line. I still keep an extra $20 tucked away in my wallet because of those experiences. Jessica’s generation saw none of this, with the notable exception of educational cost inflation. Today she describes just how differently her demographic group thinks about price levels. And it is VERY different from the Boomers…
It’s no secret we millennials are pro multi-taskers when it comes to technology, and we’re often on our mobile phones and laptops while watching TV all at the same time. There is one device, however, of the three that is far harder for us to give up. No prizes for guessing which one:
- A recent Harris Poll of 2,193 U.S. adults surveyed in January shows that 61% of millennials name mobile phones as the most difficult device to unplug from, compared to television (21%) and computer/laptop (22%).
- That contrasts our parents’ generation – the baby boomers – with mobile phones nearing the bottom of the list (28%) and the top two spots going to computer/laptop (37%) and television (44%).
Dig deeper into the survey and the reasoning becomes clear, as the utility of mobile phones has increased dramatically during our lifetimes. For example, the survey notes that unplugging to the broader population means avoiding: social media (71%), the Internet (64%), email (58%), text messages (55%), mobile or tablet apps (55%), video games on consoles or handheld game devices (51%), computer games (50%), phone calls (48%), television (45%), eBooks (30%), and audio books (21%). People can participate in nearly all of these activities on mobile phones, and we’ve grown up with this benefit. So of course we’d opt for our cell phone over a TV or laptop – we can use it for all three functions.
The dominance of mobile phones and technology in our lives not only impact how we use our time, but how we spend our money. The Federal Reserve has based its inflation expectations on a relatively static basket of goods for decades, but millennials’ experience with inflation differs from our parents. Services replace physical goods, for example, while convenience gets baked into costs. Here are four variables that shape our inflation expectations:
#1 – Technology (Deflationary): When I go to the mall with friends, I rarely buy anything. Why? Because I know I can find whatever I like cheaper online. Merchants used to earn a premium for holding products customers couldn’t find elsewhere locally. Technology and the internet erase this premium and put downward pressure on the price of goods because they provide access to products all over the world, increasing competition and acting as an arbitrage.
For example, I’ll browse bookstores, but when a book peaks my interest, I’ll only take note of the title. Same goes for technology gadgets or devices. I know I can buy them from Amazon, for example, for a lower price, either from the site or another merchant the site hosts. I don’t even need to pay for shipping since I have a prime account, and receive my purchase in just two days. Like many other sites, Amazon’s business model hinges on maintaining competitive prices and making the consumer experience more convenient. In short, the internet offers ample price comparisons and serves as an effective platform to highlight promotional sales. Paying full price at the mall is rare except for last minute needs.
#2 – Sharing Economy (Deflationary): During my adolescence, I’d dedicate one category on my Christmas list to CDs. That was until iTunes came along and I could more affordably purchase single songs I particularly enjoyed. Now, music streaming services have totally changed the game. On Spotify, for example, I can make customized song lists and listen to them for a month, all for the price of less than a CD. A premium subscription to Spotify costs $10 per month versus buying a CD at Target for upwards of $15. You can even listen to music streaming services for free, if you’re willing to listen to ads and in shuffle play mode.
Here are some other similar examples. I don’t pay for cable because I can stream numerous shows and movies for only $8.99 a month on Netflix (in this case I don’t even need a TV since I can watch on my laptop or cell phone). I’m also able to travel a little more due to services like Airbnb, as I can find an inexpensive, comfortable place to stay. Lastly, many of my friends who live in the city don’t have a car because they can take an Uber if necessary. It’s like having a personal driver that picks them up where and at what time they want to get them to their intended destination. Bottom line: these examples show services substituting physical goods, enabling the sharing economy to act as a deflationary force in millennials’ lives.
#3 – Social Media (Weirdly Inflationary): I’ll be the first to admit, I often covet a friend’s new handbag or latest trip when I see pictures on Instagram. Has this inspired a few purchases or vacations on my behalf? I think you know the answer. Social media, in this sense, has created what you’ve probably heard of as “lifestyle inflation”.
“Keeping up with the Joneses” is nothing new, but platforms like Facebook have taken it to a new level. Everyone you know or connect with on social media can view your life more intimately than ever before, even if they live halfway around the world. A Facebook or Instagram account, for example, gives people the opportunity to portray a glamorized life. This creates competition, and may spur more expensive purchases than some individuals would have otherwise pursued. This includes everything from clothes to experiences in order to show off on the web. We also value peer reviews on products and restaurants, and will heed these opinions to attain a better quality product or service. All in all, social media is inflationary as millennials try to match or outdo each other’s lifestyle, and is a seamless advertising medium.
# 4 – Convenience (Inflationary, but by choice): I don’t know about you, but I dread going to the supermarket. Having to navigate through crowds and carve a chunk of time out of my busy schedule is less than ideal. That’s why I will gladly pay a grocery store delivery service to do it for me. I know I’m not alone on this front in light of the plethora of startups launching delivery services related to everything from groceries (Instacart) and laundry (Cleanly) to alcohol (Saucey) and takeout (GrubHub). Some apps only serve certain cities, but larger companies are working to fill the void elsewhere. Amazon, for example, shows this in its effort to deliver by drone or its own trucks. They are also working on making delivery times faster with Prime Now, a same-day delivery app. Bottom line here: we’ll pay extra for convenience (inflationary), but expect this premium to abate overtime as we transition to a more on demand economy.
In sum, millennials’ inflationary basket isn’t as simple as weighting goods within large standard components like food, housing, transportation, and entertainment. Student loans, obviously not directly in the Consumer Price Index, account for one of our largest monthly payments. We therefore can’t afford a house, and a lot of us live with our parents as rental costs continue to climb. Many also can’t afford a car, in which Uber proves especially helpful. That’s why we depend on services that provide access to goods without requiring ownership. This keeps expenses low and convenience high. We care about what our friends think and have serious FOMO (fear of missing out), so we’re less reluctant to save and more inclined to travel or buy new clothes when we can. Fortunately, however, technology and startups continue to bring costs down as we benefit from each other’s contributions online and in the sharing economy. In this sense, we are more privy to the deflationary impact of technology and services, in contrast to our parents’ experience with inflation of physical goods, such as food and gasoline.
Now, I realize economists wouldn’t consider the four themes I outlined as actual inflation or deflation. They simply show how my cohort experiences price pressures that inform our thinking on the topic. This is important, however, for policy going forward as it could alter the Fed’s dual mandate on the inflation side. The expectation of deflation is already incorporated in millennial psyche, so it doesn’t necessarily delay spending as seen in Japan. We adopt technologies that force deflation. Therefore, in our world, deflation is the mark of a healthy economy.