Markets began tanking this morning on a higher than expected 8.2% increase in the Consumer Price Index. Food and energy costs are drivers of this, but so is airfare. Here’s why fares are going up, and why the airlines – through their conscious decisions – have caused a piece of inflation that’s driving down markets.
Yikes: Airfare component of September CPI #inflation up by 42.9% y/y, fastest rate on record pic.twitter.com/5OCS9uIIfc
— Liz Ann Sonders (@LizAnnSonders) October 13, 2022
Like energy costs, airfare is recovering from depressed levels. But it’s not only that. Passenger demand has outpaced seat growth, in part because airlines retired planes and pushed out workers during the pandemic. Numerous airlines have scaled back their schedules to ensure they could operate as planned, lacking the wherewithal to deliver on planned flights. Airfares represent less than 1% of the basket of goods considered in CPI, but are helping to drive the number higher.
Without the ability to deliver seats, planes have been especially full even at high cost. In that sense, airlines’ failure to honor the full employment purpose of pandemic subsidies ($54 billion in direct taxpayer cash, on top of subsidized loans, tax breaks, and cash for partners that wound up bolstering their balance sheets) means higher prices today, higher measured inflation, and lower markets.
Higher inflation is driving down markets because it’s taken as a signal that the Federal Reserve will raise rates more aggressively than expected, or rather than the Fed is less likely to reduce its rate of increase. That’s probably correct.
All of the burden of reducing inflation is falling to the Fed, when in fact there are really (3) major policy levers that could be put into play (and indeed were a part of slowing inflation in the early 1980s).
- Monetary
- Fiscal
- Regulatory
At root, inflation is a function of too much money chasing too few goods. The fed ‘controls the money supply’ (albeit indirectly) but a significant portion of inflation has been driven by fiscal growth (increased government spending). That’s not being scaled back, in fact immediately following the Inflation Reduction Act – whose only mechanism for reducing inflation was supposed to be increased taxes, reducing net government outflows – the Biden administration announced an even more costly program of student loan forgiveness.
But money supply isn’t the only issue, it’s just one side of the equation (really, the quantity of money along with how quickly that money is being spent). The other side is available goods. We can grow our way out of inflaton, and policies that mean more goods and services in the economy are anti-inflationary. Rather than a deregulatory stance, the current administration has pursued its opposite. And so we’re left with the Fed tinkering with the money supply.
The challenge here is, as Harvard’s Greg Mankiw reminds us, monetary policy acts with a lag. The hope for a ‘soft landing’ is nearly impossible, since the Fed will nearly always overshoot (and if it doesn’t it will be pure accident).
There’s a delay of “six or nine or twelve or fifteen months” between its policy moves and where the market ends up, “[h]ence they feel impelled to step on the brake, or the accelerator, as the case may be too hard.”
I don’t know whether the Federal Reserve is currently too hawkish, but they do not know either. I do know that the airfare component is one piece of today’s inflation numbers, and that’s driven both by the desire to travel (and money in consumers’ juiced-up pockets to do so) and also by airline capacity which was constrained even as carriers took taxpayer money to prevent those constraints.
(HT: @crucker)
You clearly aren’t an economist, Gary.
I’m not sure why you expect airlines or any other employee or entity to accept a loss in buying power because the government mismanaged the covid recovery.
Inflation cuts across all sectors of the economy.
It is precisely because consumers are paying a higher price than they did pre-covid for air travel – that airlines continue to raise fares. It is supply and demand and airlines would be justified in raising fares to meet demand based solely on that metric.
And before the government even released inflation data today, Delta released its 3rd quarter earnings which show that DAL is back to being the world’s most profitable airline even if its margins and profits are still short of pre-covid levels. Delta also got a $195 million benefit specifically from its refinery which is a direct return on its former investment which is also a very effective anti-inflation tool.
Obviously there are many factors in play, including among many others the Ukraine War, sheer corporate greed, climate change beginning to really bite, the U.S. foolishly still exporting 30% of its oil, and to people overreacting because they haven’t seen such inflation before. (In the 1970s when we had a rough patch I well remember my father, 1900-90, asking why people hadn’t learned from the Depression. My mother stopped him with a comment, “Nobody’s left who does!”)
Without trying to get too political–though it seems impossible to avoid that these days, dad also said that people vote their pocketbooks, and so will get mad at whoever is in office, even though they might have had little or nothing to do with starting the current cycle of inflation. Thom Hartmann, the progressive commentator, believes Republicans spend like crazy and then blame Democrats for the resulting problems and cut-backs, with in this case allies in the Fed adding to the misery. Perhaps, but in any case world economics is far more complicated than simply raising interest rates and I’m not sure how far that will control this cycle. And perhaps nobody knows. One thing I’ve said for years though, is that this is going to be (and now is) a rough century.
@Tim Dunn – you either did not read or did not understand what I wrote.
“I’m not sure why you expect airlines or any other employee or entity to accept a loss in buying power because the government mismanaged the covid recovery.”
Where did I write that? I *think* you’re hearing something I didn’t say, Biden’s silly position that oil companies should just charge less (which by the way would mean shortages, with more demand at the price). Not what I’ve written. I’m suggesting that failing to live up to the purpose of the bailouts means fewer airline seats supplied, which is one driver of higher prices. That’s indisputable.
“Inflation cuts across all sectors of the economy.” Yes, airfare inflation is up more than most, but as I note is a small part of CPI. No disagreement with me…
“It is precisely because consumers are paying a higher price than they did pre-covid for air travel – that airlines continue to raise fares. It is supply and demand and airlines would be justified in raising fares to meet demand based solely on that metric.”
Again, yes – but part of the reason why prices are up isn’t just demand up, it’s supply constraints as I explain in the post [and you ignore]
“And before the government even released inflation data today, Delta released its 3rd quarter earnings which show that DAL is back to being the world’s most profitable airline even if its margins and profits are still short of pre-covid levels. ”
Bingo, Delta’s #s underscore what’s in the inflation data!
“Delta also got a $195 million benefit specifically from its refinery which is a direct return on its former investment which is also a very effective anti-inflation tool.”
Umm… Delta’s refinery is doing well now after doing poorly for most of the time it’s owned it, and the subsidies that refinery has received go unmentioned, but ok. That Delta owns the refinery is not an ‘inflation-fighting tool.’ However that the refinery *exists* certainly helps with energy supply. The U.S. makes it nearly impossible to add refinery capacity, we certainly do not want less!
At this point, money isn’t being dumped into the economy directly into consumer pockets for quite some time (for example, most unemployment went away last September). I’m not so sure I buy that premise.
I’m not an economist, so this is 100% an armchair thought.
Markets are green right now – time to edit the article LOL
@Tim Dunn. I wish you stop bashing the author (Gary) and other readers. You are entitled to your option (as others) but your continuing criticizing others is starting to get old. Just state your comments.
Gary,
You have no more clue what is in the Cares Act or any other aid to airlines than does Elizabeth Warren. There simply is nothing there that dictates the amount of capacity that airlines had to re-add. As long as you continue to believe what is simply not in the law, you will come to the wrong conclusions over and over and over again
The Cares Act was a jobs bill that first and foremost kept AAL from immediate bankruptcy. UAL would have been behind. With Texas being the headquarters for 2 out of the big 4 and with tens of thousands of Texas airline employee jobs on the line, the Cares Act sailed through both houses of Congress.
The reason for inflation is because the Biden Administration has distorted every aspect of the supply chain – fuel, labor costs, and raw materials – erroneously believing that throwing money at an economic problem will fix it when the evidence has over and over been that huge amounts of stimulus added to an otherwise healthy economy causes inflation. The pandemic induced economic problems in the world were due to lockdowns and the answer had to solely have been to reopen the economy, not throw money at consumers which have kept them flush with cash for months after stimulus ended – witness the era of the great resignation.
Delta’s refinery has saved Delta over $1 billion even before last summer; it has tacked on another $1 billion in fuel cost savings for Delta in a little over a year. Delta’s financial statements show that the intent of the refinery is to reduce the cost Delta pays for jet fuel and extends BEYOND the subsidiary accounting that they have to do for the refinery on a standalone basis. Delta saved 3-5 cents/gallon for years compared to AA and UA, its most direct competitors which also do not hedge. Net of the costs of the refinery, DL’s fuel costs are about $1 billion lower over a decade. Given that the reason for the refinery’s growing profits in the NE is because of a SUPPLY imbalance in NE refinery capacity, the refinery will continue to generate significant savings for DL – on top of its higher fuel efficiency compared to AA and DL and offsetting part of the gains which WN gets from hedging.
As I said before, you clearly don’t know what you are talking about regarding either economics of financial statements. Continuing to repeat the same incorrect statements won’t make them become true.
@HT +1
Corporate media pushing the narrative and always blames working people/consumers for failures of Capitalism. When government hands out $$$ trillions to billionaires, donor class, and corporations, there is no inflation. Very simple reason: now these same corporations know that people have money so price gauging and profiteering across the board to get some of that money. I know there are more factors (supply & demand, post-Covid supply chain issues, et.), but this is also a major cause of it.
Well, this story didn’t age well. Two hours into the trading day and the US stock market is up 1.5%
… and airlines are ahead of the general stock market rally and Delta is leading US airlines.
The market has priced negativity into the market for months.
A few companies that report strong earnings proves all of the doomsday scenarios are incorrect – Walgreens Boots also reported strong profits.
You mean today’s upmarket now? 😉
Delta is expecting strong travel demand ahead. Seems like they think that there are still enough middle and upper class leisure travelers and OPM travellers with enough money to spend on travel that they will keep going like crazy by air despite what has gone on with the real income and real wealth scene for the majority of Americans. And that real income and wealth scene is even worse outside the US than in the US. And just wait until an opening of China drives up ONG prices in conjunction with the Russian and OPEC kingpins playing their oh too typical games.
I still don’t see how we avoid a hard landing economically while the Fed is on its inflation-fighting kick like it is and the foreign inflation scene is pretty ugly too.
The idea that increased taxes lower inflation is right from MMT playbook. Unfortunately, this has nothing to do with reality. What is happening right now is much better described by Austrian economic theory, too bad it’s been pushed out of mainstream by Keynesians clergy class.
But inflation is only up an inch from last month .everything is doing better the past 18months. your 401k is at all times high. Gas prices have fallen the past 4months and no more mean tweets
So far since last summer we have taken 4 flights (includes all stops) and 9 cruises. When it comes to inflation, we vote with our feet, I mean flippers. Good luck airlines with your strikes and jacking prices.
JJojo are you insane none of what you said is true!! Inflation is up above 9%,401 k down 40% GAS IS STILL UP OVER $7.00 in some states..??? Thanks Joe Are you joking I hope!!
Any(the other one) you arae correct More taxes not helping anyone…
yeah, the markets are sure tanking today
@Tim Dunn you can keep coming at me with insults but what’s much more problematic is that you respond with strawmen and non-sequiturs.
“You have no more clue what is in the Cares Act or any other aid to airlines than does Elizabeth Warren.”
I read most of the CARES Act, and every word related to airlines – not just the Act, but also all of the related guidance, applications and reports.
“There simply is nothing there that dictates the amount of capacity that airlines had to re-add.”
Correct. And with a couple of exceptions that were largely given a pass, airlines mostly complied with what was in the Act. Remember, they had a hand in writing the language!
It is not my contention that airlines violated the law in paying employees to leave, or threatening them with termination due to a lapse in subsidies to make them leave. They raised the money – especially the second and third tranches, which had nothing to do with the CARES Act – with the argument that this would ensure airlines were ready to fly when travelers returned, by keeping their workers connected to the airline. And that’s what didn’t happen BY DESIGN. And that had CONSEQUENCES for capacity, which in turn had consequences for price which is now reflected in CPI.
“The reason for inflation is because the Biden Administration has distorted every aspect of the supply chain – fuel, labor costs, and raw materials – erroneously believing that throwing money at an economic problem will fix it when the evidence has over and over been that huge amounts of stimulus added to an otherwise healthy economy causes inflation.”
There’s a lot to unpack here but it’s certainly not “the reason” for inflation, which is driven by a combination of expansion of the Fed balance sheet in addition to low rates; a level of spending that began under the Trump administration and continued to grow under the Biden administration; and to a lesser extent increasing regulation which restricts capacity (both Trump and Biden to blame, for instance, for tariffs).
Stimulus alone didn’t do it, but inflation would have been much lower (but still above the Fed’s 2% target) without it.
Delta’s refinery has saved Delta over $1 billion even before last summer; it has tacked on another $1 billion in fuel cost savings for Delta in a little over a year. Delta’s financial statements show that the intent of the refinery is to reduce the cost Delta pays for jet fuel and extends BEYOND the subsidiary accounting that they have to do for the refinery on a standalone basis. Delta saved 3-5 cents/gallon for years compared to AA and UA, its most direct competitors which also do not hedge. Net of the costs of the refinery, DL’s fuel costs are about $1 billion lower over a decade. Given that the reason for the refinery’s growing profits in the NE is because of a SUPPLY imbalance in NE refinery capacity, the refinery will continue to generate significant savings for DL – on top of its higher fuel efficiency compared to AA and DL and offsetting part of the gains which WN gets from hedging.
As I said before, you clearly don’t know what you are talking about regarding either economics of financial statements. Continuing to repeat the same incorrect statements won’t make them become true.
Only a Trump administration could hand out money to corporations without securing anything but higher prices for taxpayers. What an utter mismanagement.
Gary,
forgive me for being rough in addressing you.
My point is still the same, though.
If Congress wanted certain outcomes from the aid to airlines, they should have put them into the law. I don’t pay my taxes based on the spirit of the law but based on the letter of the law. Either you can cite what the airlines DID NOT DO in the law or they complied. not mostly, not almost. But either they complied or they didn’t. And it isn’t the airlines’ fault if Congress didn’t ensure the industry was held to some sort of standard. Everyone is standing in line for cash in Washington. It is Congress’ job to make sure the laws reflect what is in the best interest.
There was a far different scenario by the fall of 2020 than existed in the spring of 2020 when Trump started pushing for tax cuts. The country was in lockdown, people were dying, there were no vaccines. Alot of that was still happening by the fall but we had a much better understanding of risk factors. Trump wanted to reopen and the difference between Democrat and Republican led states was that the former wanted to keep lockdowns while the latter wanted to end them – and largely succeeded. Death RATES weren’t that much different in the fall and beyond. Lockdowns hurt the economy and necessitated federal aid. But don’t say for a minute that all of this was Trump’s fault because what he did in dishing out the first round of aid was for very different reasons than the 2nd and 3rd rounds of the pandemic.
And I have repeatedly said on here that I did not support the 2nd and 3rd round of aid to airlines.
There are plenty of differences between economists about the reasons for inflation but given that the Fed’s answer to inflation is to choke off the money supply by raising interest rates, they are defintionally doing the opposite of what you argue didn’t cause inflation. They will not be successful in their efforts now if the root cause of inflation isn’t the opposite of what they Congress did 2 years ago -flood the market with money that distorted labor and supply chains on top of reducing US domestic fuel supplies which has caused rampant global energy crises which have only been aggravated by the Ukraine war but started long before that action because of Biden administration domestic energy policies; fuel prices can easily track when each of those contributing factors occurred.
And thank you for copying my reply about DL’s refinery and fuel strategy verbatim because that is exactly what has taken place.
And as every other airline reports their earnings and discloses their fuel costs, it will be apparent that Delta has a structural fuel cost advantage.