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“Share and share alike” from Robinson Crusoe
We all know that inflation is really important in planning for a comfortable retirement. We also know that I personally think that inflation fears are really overblown.
In this post I showed that technology is an amazing deflationary force. A few readers (like Andrew H) have noted that technology, and especially computers, are improving at such a rapid rate that it’s no wonder they are falling so much in price. But what about things that aren’t technology related? There are a lot of things we buy that aren’t computers or DVDs or internet browsers, probably spending a lot more on those than the technology-related products whose prices are going down so rapidly.
While I agree that a lot of non-technology products like food, clothing, and such do experience inflation, I think there are some surprising areas that are experiencing DEFLATION. I just tried out these new-fangled services that seem to be popular with the 20-somethings: Uber and Airbnb. What can I say? I never claimed to be on the cutting edge of this stuff.
Uber has been in the news a lot because it just had its initial public offering (IPO). Basically Uber is a taxi service. With a regular taxi you’re getting in a smelly yellow “police interceptor” with a driver whose accent is so think you can’t understand him and worry that he doesn’t know where he’s going (along with all the other negative stereotypes). But with Uber you have regular people who use their own personal car as a taxi.
First, the cars seem to me to be nicer. They’re newer model cars; I’ve done Uber now probably four times and haven’t been in a car that is noticeably old or worn or uncomfortable. Plus they are meticulously clean. It’s like riding in your friend’s car, if you’re friend is a clean freak. Advantage: Uber.
Second, they use technology well. You download the Uber app, and when you want to be picked up you click the button. Then you see a real-time map with your car driving towards you. If you live in a dense taxi city like New York or Chicago, this may not be a big deal where taxis are literally around every corner. But for the rest of us, it can sometimes be nerve-wracking wondering when (if) you taxi will be there. A few months back I literally missed a flight because my taxi never showed up. I didn’t know there was a problem until it was 10 minutes after he should have been there, and at that point it was too late. Advantage: Uber.
So there you have a couple nice advantages that Uber offers, but what about the big one: price? I’m not an expert, but I would estimate that Uber is about 30% less than a traditional taxi, especially on longer trips. I took an Uber to Charlotte airport (100 miles away) and it was about $150; Foxy Lady took one to Raleigh airport (60 miles away) and it was about $80. I would guess with a traditional taxi those prices would have been much higher. For more local trips it’s harder to say, but I figure Uber comes to about $1 per mile (and Uber-aficionados, I would welcome your enlightenment). Obviously a big part of the savings is they aren’t paying taxes to cities (a taxi medallion in Chicago or New York costs over $1 million!?!?!? Crazy). Also, they are just regular people using their own cars to make some extra cash. No matter how you slice it, it does end in significantly lower costs.
So here you have a better product than we ever got in the past for a fraction of what it used to cost us. To me that sounds like deflation.
Airbnb is another sharing economy website where people can put up their homes or vacation rentals up for rent. You go to their website and it’s like picking a hotel. You pick where you want to go and the days you want to stay there. There’s an option to pick “a bed”, “a room”, or “the whole place”. As a 38-year-old, I’m at a stage of life where the only acceptable option there would be to get the whole place, but if you’re younger and strapped for cash or want to meet new and interesting people maybe that’s something you’d want to do.
Anyway, we had a recent trip to Hawaii where we used Airbnb. We found a really nice condo right on the beach for about $900 for the week (about $140 per day). There were a couple things that struck me about this. First, the price seemed really good. My experience tells me that $140 per night will get you a nice hotel room in a mediocre location or a mediocre hotel room in a nice location. So we were probably paying what we’d pay for a nice place in a location like Des Moines, but we were in Hawaii, so that seemed like a nice win for Airbnb.
Second, our place was really nice. It was someone’s actual house. As it turns out, they travel a lot for some job in the entertainment industry, and they end up being at home about 30 weeks per year. Those other 22 weeks their place sits empty; they choose to make a little money by using Airbnb on their place, so good for them. Back to the point, it was a full-on place with a living room, kitchen, balcony, and bedroom. So compared to a 250ish square foot hotel room, we had a bonafide 800ish square foot apartment. Big advantage for Airbnb.
Third, you’re dealing directly with the owners. Our experience, plus what I have heard from a lot of others, is that the people whose homes you rent are really nice and accommodating. They are letting you have their place for a little bit and they genuinely want it to be a good experience for you. From our host, we got some nice restaurant recommendations. Not that people who work for hotels aren’t nice, but you just seem to have a deeper connection with someone when you are taking over their property. You want to be a good guest and they want to be a good host.
Finally, the place was just more comfortable. Partly because it was larger, but also because it was someone’s home and that made it easier to be our home. We were able to have a couple nice dinners at home looking out on to the ocean. I finished up the last Game of Thrones book sitting on the balcony, and I didn’t feel all crammed up in a hotel. It was just really nice.
So again, just like with Uber, Airbnb offers what is definitely a much, much better product, and they are able to do it at probably what you’re paying to a medium-caliber hotel. Put those two ingredients together and you get . . . DEFLATION.
The point of all this isn’t Uber or Airbnb, per se. It isn’t even diving into the sharing economy. Rather the bigger picture is looking at how inflation is supposed to be raising the price of everything, and if you look at things closely it kind of is. Cab fares go up every couple years, and hotel rates are constantly increasing.
But we live in the most innovative and dynamic of times. People are finding ways to bring us better products at lower prices. If you broaden that view to “a place to stay while I’m in Hawaii” you don’t have to get that hotel whose prices go up about 5% per year. If you broaden that view to “safe and clean transportation to Charlotte” you don’t have to go in a cab whose rates the states allow to increase every few years.
And remember that at the beginning of this blog we said that most people agree that technology areas are likely to have prices fall, but more traditional areas will still experience inflation. That’s true to some degree, but aren’t hotels and taxi pretty opposite of high tech? And we just showed that their prices are coming down. This is just another corner of the economy that is giving you more for less—deflation. Another reason why I think inflation concerns are way over inflated (ha, ha. Did you see what I did right there?).