The small packages also don’t fool the people who compile the inflation statistics.
If a 16 ounce box contracts to 14 ounces and the price stays the same, I asked Bureau of Labor Statistics economist Jonathan Church, how is that recorded? “Rise in prices,” he said quickly. You simply divide the price by 14 instead of 16 and get the price per ounce. Correcting the contraction is simple.
New service charges for things that were previously included in the price, from rice at a Thai restaurant to delivery of topsoil, rarely override inflation figures, nor do they mislead consumers.
But a stealthier contraction is plaguing today’s economy: declining quality rather than quantity. Often intangible, lost value is difficult to capture in price indices.
Faced with labor shortages, for example, many hotels have eliminated daily housekeeping. For the same room price, customers benefit from fewer services. It’s not conceptually different from shrinking a bag of chips. But would the consumer price index absorb the change?
Probably not, says Church.
Measuring inflation is difficult. The goal is to capture changes in the overall price level – the numbers on each price tag – not fluctuations in relative prices. You want to see how much the cost of living, represented by the price of a consistent basket of goods and services, has changed.
It is different from the number of hamburgers equivalent to a gallon of gasoline or the number of apples equivalent to a movie ticket. Relative prices can and do change all the time without constituting inflation. But for today’s cost-of-living basket to measure the same as yesterday’s, the goods and services themselves must remain the same. And they too tend to change, especially when technology is involved.
BLS economists have many ways to fix these changes, but they err on the side of conservatism. They look for specific, quantifiable differences that customers can reasonably notice and care about, and which can be incorporated into statistical models. A larger television screen with a higher definition picture is likely more valuable to consumers. But what about a hotel room with nicer linens? It’s more delicate. The less measurable the change, the more difficult it is to correct it.
During the 2000s and 2010s, inflation was likely overstated due to unmeasured increases in quality. Now, it’s the opposite phenomenon. Quality cuts have become so pervasive that even today’s scary inflation numbers are almost certainly understated.
Paper towels from a local smoothie shop, a friend points out, have become so thin and small that they are “almost useless”. But price followers would only look at the smoothie itself disregarding the lousy napkins.
A Starbucks latte may cost the same, but if the store now closes at 4 p.m. instead of 6 p.m. — or varies its hours unpredictably based on availability for work — customers get less for their money. Shorter and less predictable schedules have become common in many service businesses.
Take my recent trip to Bank of America. Arrived around 3:15 to do a survey for my condo association to find the metal security gate down and only the ATMs in the lobby were available. A sign said the branch was open until 4:00 p.m. – already a reduction in hours from the old schedule – but that was not the case. At a second branch, where I was turned away because closing time was approaching, I met a mother and her adult daughter who were on their third unsuccessful branch visit. Coming back another day, they said, meant getting more time off from work. This cost would not be included in official measures of inflation.
Similarly, airline ticket prices fell slightly in June, but that does not mean that the cost of air travel is falling. Bags are five times more likely to get misplaced than a year ago, and security lines are incredibly long. On July 2, I spent four hours waiting with thousands of other passengers to go through security at Amsterdam’s Schiphol Airport. Whether or not the ticket price was higher than a year earlier, the intangible cost certainly was. While this example is extreme, longer waits for any type of service, from doctor’s appointments to sandwich orders, are becoming common.
Even if income follows inflation, declines in quality are aggravating and depressing. They make consumers feel helpless and taken for granted, which can lead to angry confrontations. They create a pervasive feeling that the world is getting worse. They demand a toll that economic statistics cannot capture.
More other writers at Bloomberg Opinion:
• Shrinkflation is an economic monster worth watching: Stephen Mihm
• Inflation is even worse if you measure it correctly: Justin Fox
• Inflation ate your free lunch, but you’re still better off: Allison Schrager
(Adjusts the effect on inflation calculations of unmeasured quality increases during the years 2000 and 2010 in the 12th paragraph.)
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Virginia Postrel is a Bloomberg Opinion columnist. She is a visiting scholar at the Smith Institute for Political Economy and Philosophy at Chapman University and author, most recently, of “The Fabric of Civilization: How Textiles Made the World”.
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