Inflationary Feedback Loops in Financialized Capitalism: the Reduction of Market Participation by Low-End Consumers feature image

Inflationary Feedback Loops in Financialized Capitalism: the Reduction of Market Participation by Low-End Consumers

In Canada, the real estate problem has become so enduring that younger generations, and those who are older but without sufficient accumulated wealth, are no longer able to participate in the home ownership market. Home ownerships rates grew from 1981 to 2011 to 69%, and have since declined to 66%1. During the same 2011 to 2021 period, tenanted (renting) households have increased by 22%2. This trend is evidence of a shrinking market in which the lower end of potential home owners has been locked out of the housing market permanently—it is possible that home ownership rates in Canada have peaked. As a result, developers continue to favour luxury housing to satisfy profit margins. This puts upward pressure on prices, and results in a feedback loop in which developers continue to produce high-priced housing only for the wealthiest portions of the general public. As Western capitalism evolves, this problematic effect on production—caused in part by the financialization of most major producers seeking infinite growth—has also been spreading to other industries, not just real estate.

The surge in inflation rates that was seen globally after most COVID-19 lockdowns were lifted has decreased in 2024, however the high prices that came with it have not. While this has had negative impacts on consumers in the lower half of income brackets in most countries, it has also exacerbated another problem in the commercial market: the cost of production.

For the past decade, the market for "luxury" goods has seen significant growth. Between 2013 and 2023 the value of this market grew from $226.61 billion to $346.19 billion, an increase of roughly 53%3. While most of these companies defend producing for these wealthy demographics by implicitly communicating via their marketing that "buying this is a choice for those who can afford it", this minimizes the effects producing for wealthy markets has on lower-tiered goods and their consumers. In many industries, just like the housing problem, this leads to affordable versions of products either being removed from product lines completely, or a great reduction in the production supply of these lower-tiered products to the demographics who need them most. Retail affordability in housing, food, and other basic retail items is what permitted so many people in Westernized North America to accumulate material wealth and comfort, a feature of North American economies that resulted from the industrialization boom of the first half of the 20th century, which has all but disappeared and is only sustained by the exploitation of cheaper off-shore labour.

Low-End Consumerism

Most products have varying degrees of quality and prices despite their function being essentially the same. Whether it be cooking knives, bicycles, automobiles, etc., many of these products are often important to the day-to-day life of the individual who exists within the framework of industrialized society. Across the trim level of these products we find the high-priced, luxury versions, which are consumed by the "high-end", wealthy consumers. Entry-level and cheaper versions of these products are generally consumed by "low-end", or relatively poorer consumers. Traditionally, the bulk of production volume(s) was marketed towards low-end and mid-level consumers. Companies relied on selling higher volumes of merchandise, as it had the largest pool of potential buyers, at entry-level price points, and making the bulk of profits on the number of units sold, even if margins were generally lower. This resulted in the greatest number of goods a the cheapest possible competitive price, a good outcome for the average consumer. As publicly-traded companies and investment banks have increasingly consolidated ownership of major goods-producting companies, this trend has changed.

Reducing Market Participation of the Low-End Consumer

High-margin goods have become a preferred strategy for many companies as a result of the declining margins associated with higher production costs. Higher margins require less volume to produce an equal amount of gross profit. With the increasing cost of producing low-end goods causing smaller and smaller profit margins, the focus of many commercial enterprises is on the upper-mid tier of consumers. These high-end consumers have enough disposable income for higher-tiered versions of the same product, and are often the group targeted most by marketing campaigns. As a result, they pay more for a product that has a non-linear correlation between production cost and price, and thus boost margins for the seller.

The Bicycle Industry: A Real-World Example

Let's use an example here I am personally familiar with: bicycles. The new bicycle market is a challenging one to operate in: most old bicycles last a very long time, and there is no real need for the average consumer to upgrade as they are essentially the same as they were 40 years ago with only small marginal improvements. The price range for a new bicycle model by a major manufacturer can be huge. The same model of bicycle can cost $1,000 USD at its lowest trim level and over $12,000 at its highest, with many options somewhere in between. The only real difference between these models is slight weight savings, and slightly higher quality components. Effectively they are otherwise the same, broadly speaking.

Similarly, there has been a trend of "luxurious" bicycle brands whose products reach unfathomable prices to be acquired by investment capital firms and conglomerates seeking investment return:

While the motivation for price increases in financialized brands towards luxury products may be more obvious, we also see the same thing in brands who are still privately held (Specialized, Trek, etc.).

YouTube shilling culture has produced a whole network of stooges whose channels (and in some cases, livelihoods) are entirely dependent on promoting the marketing of these companies towards their mid and higher tiered bicycles. This has resulted in a) the low-end consumer no longer being actively marketed to, and b) a turning-inward of the low-end consumer to the used bicycle market instead. This, in combination with a failure of the cycling industry to reset elevated prices set by the high demand during the COVID business boom, has led to a general shrinking of the bicycle sales market and many companies operating in this industry are now failing or significantly reducing their size. Instead of reducing prices and refocusing efforts toward lower-tiered consumers, these brands are expecting to continue operations geared towards the luxury market.

Concluding Summary

Why does this matter? The feedback loops resulting from higher production costs in conjunction with the trend towards luxury goods production and away from goods for the low-end consumer has resulted in an acceleration of inflationary price increases. While these price increases are not captured in C.P.I. statistics due to not qualifying as essential goods in most cases, it results in many of the following net-negative outcomes for consumers and the broader capitalist economy as a whole:

To combat this, as an individual consumer, one can avoid the new markets for products whose owners are padding margins with luxury goods. Purchasing from used markets where possible (or not purchasing at all), or purchasing from companies who do not engage in this price-squeezing behaviour, may be all the individual low-end consumer can do. However, this trend is a symptom of unproductive capitalism via financialization and inflation that is a broader problem for Westernized economies as a whole as the financialization of global markets continues to grow.

References
  1. Zhu, Y., Chen, M., & Su, H. (2024). The big contradiction between the dream and the reality of homeownership: access to homeownership in Canada, 1986–2016. Housing Studies, 1–27. https://doi.org/10.1080/02673037.2024.2415048
  2. Statistics Canada. To buy or to rent: The housing market continues to be reshaped by several factors as Canadians search for an affordable place to call home. https://www150.statcan.gc.ca/n1/daily-quotidien/220921/dq220921b-eng.htm
  3. Sergei Chernov, Dmitry Gura, The luxury goods market: Understanding the psychology of Chinese consumers, European Research on Management and Business Economics, Volume 30, Issue 3, 2024, 100254, ISSN 2444-8834, https://doi.org/10.1016/j.iedeen.2024.100254.