Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Stagflation Is Reshaping the Textbook Publishing Industry
Transcript
- Lucas: So I was looking at the July CPI report that came out this week, and while everyone's focused on the headline 3.4 percent annual rate, there's a quieter story in the cost of educational materials. Those are up nearly six percent year-over-year, and that's not just a blip. Luna: Right, and we've talked about how sticky some prices are in this environment, but educational materials feel like a double whammy. Schools are dealing with tighter budgets because of slow growth, while the publishers are facing higher input costs. Lucas: Exactly. And that's what I want to drill into today: how textbook publishers are navigating this stagflationary squeeze. It's a perfect case study because they're caught between two forces. On one side, paper, ink, and shipping costs are up. On the other, their main customers — school districts and universities — are seeing their funding stagnate. Luna: So what's the breaking point? I mean, we saw in the apparel and grocery episodes that companies pass costs on to consumers, but when your consumer is a school district, you can't just raise prices endlessly. Lucas: That's exactly the bind. Let's take a big player like Pearson, which dominates higher education. They've been shifting toward digital and subscription models for years, but this economic environment is accelerating that shift. In their last earnings call, they highlighted that digital revenues now make up most of their total, and that's partly because they can update content faster without printing new editions. Luna: So digital isn't just a convenience play, it's a hedge against input inflation. Makes sense. But what about the used textbook market? I've heard that's actually thriving. Lucas: It's booming. With new textbooks costing anywhere from a hundred to three hundred dollars, students are turning to used copies and rental programs. Chegg and Amazon's textbook rental have become lifelines. And interestingly, that's pushing publishers to rethink their pricing strategies. They can't just keep raising list prices because that pushes more students to the secondary market. Luna: So it's a classic stagflation scenario: slow growth, high costs, and a consumer that's already stretched. But I'm curious — how does this tie into the broader economy right now? We've got real GDP growth at only one and a half percent, unemployment at 4.1 percent, and inflation at 3.4 percent. That's the stagflationary backdrop, but what's the specific mechanism for publishers? Lucas: Let's break it down. For a publisher, the biggest costs are paper, printing, and distribution. Paper prices have been volatile, and energy costs directly hit printing and shipping. Meanwhile, school districts are funded by property taxes and state budgets, which grow slowly when the economy is sluggish. So their purchasing power is shrinking in real terms. Luna: And that's why we're seeing those stark choices in districts about whether to buy new textbooks or repair older ones. I read a story about a district in Ohio that's using AI to create custom materials because they can't afford the traditional ones. Lucas: That's a great example. And that's where the AI angle comes in. Publishers are using AI to lower production costs — generating test banks, updating content, even formatting. That helps them maintain margins without raising prices as much. But it also means fewer jobs for human editorial staff, which is a trade-off we're seeing across industries. Luna: So AI is the margin saver. But is it changing the product itself? I mean, are we moving away from the traditional textbook toward something more dynamic? Lucas: Definitely. The classic textbook was a static snapshot of knowledge, updated every few years. Now, with digital subscription models, content can be updated continuously. That's a fundamental shift. And in a stagflationary environment, that flexibility is valuable because it reduces the need for new editions — which were often just cash grabs with minimal changes. Luna: That's a bold statement, but I think you're right. So if you're a smaller publisher, how do you survive? You don't have Pearson's scale or AI investment. Lucas: Smaller publishers are consolidating or focusing on niche markets where they can charge premium prices. For example, specialized textbooks for advanced STEM courses are less price-sensitive. But even there, they're facing pressure from open educational resources — free online materials that are good enough for many intro courses. Luna: So the whole industry is being squeezed from every side. It's like a pincer movement: costs up, demand down, and a free alternative on the flank. How are investors reading this? I saw that Pearson's stock has been relatively stable, but is that justified? Lucas: Investors are betting that Pearson's digital pivot will pay off long-term. They've been profitable and have a strong balance sheet, which is rare in this environment. But if you look at the broader educational publishing sector, many companies are trading at low price to earnings ratios because the market sees structural decline. That said, the subscription revenue is sticky, which is something investors value right now. Luna: Sticky revenue in a slow-growth economy — that's gold. And speaking of gold, it's up three percent this week alone. But that's a different episode. For now, I'm wondering about the K-12 side. University students can switch to rentals or digital, but elementary and high schools are mandated to have certain materials. How are they coping? Lucas: K-12 is a different beast. They're often locked into multi-year contracts with publishers, so they can't switch easily. But districts are getting creative — some are forming buying cooperatives to negotiate better prices, and others are lobbying for state funding increases. However, with state budgets tight, that's an uphill battle. Luna: So it's a war of attrition. And it makes me think about the long-term implications for education. If schools can't afford quality materials, that's a huge problem for human capital, which feeds right back into economic growth. Lucas: That's the real tragedy of stagflation in this sector. You're not just seeing a business squeeze, you're seeing a potential decline in educational quality. And that's something we all pay for eventually. It's why I think this topic deserves more attention than it gets. Luna: Absolutely. And it's a reminder of why we do this show — to make sense of these connections. If walking through the economy with us has made something click for you, that's what keeps us going. And listener support is what keeps the show ad-free and independent. If you value that, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it means a lot. It helps us keep digging into these angles without worrying about sponsors. So, back to the economics — I want to look at the numbers from this week. The July CPI came in at 0.1 percent month-over-month, which was as expected, but the annual rate is still 3.4 percent. And core inflation is even stickier at 3.4 percent. That's the kind of inflation that eats into school budgets. Luna: And with real GDP growth at just 1.5 percent, that's the stagflationary recipe. But what's interesting is that the ten-year breakeven inflation rate is actually down slightly to 2.27 percent. Does that signal that the market expects inflation to ease? Lucas: That's a good point. The market is pricing in lower inflation over the next decade, but that doesn't mean the next few years will be smooth. The Fed is walking a tightrope — they can't tighten too much because growth is weak, but they need to bring inflation down. That uncertainty is tough for publishers planning long-term investments. Luna: So what does the next five years look like for the publishing industry if this environment persists? Lucas: I think we'll see further consolidation, more aggressive adoption of AI, and a continued shift to subscription models. Print won't disappear entirely, but it will become a premium product. The big publishers will survive, but they'll be leaner and more tech-driven. The risk is that smaller, independent publishers get squeezed out, which could reduce diversity in educational content. Luna: That's a sobering thought. But maybe it also opens the door for innovation — new players who can deliver quality content more cheaply. Lucas: Exactly. And that's the silver lining. Stagflation is painful, but it forces industries to adapt. The publishers that embrace change will come out stronger. And for us as listeners, it's a reminder that the economy is always in flux, and the companies that survive are the ones that can pivot. Luna: Well said. And on that note, I think we've covered a lot of ground. Thanks for joining us on this deep dive into textbook publishing. If you have thoughts on how your school or industry is handling these pressures, we'd love to hear from you. Lucas: Until next time, keep questioning the numbers.