Shadow Inflation Is Costing You and You Might Not Even Know It

It seems every week we are hearing news about inflation and coming up with new names for an old problem. It is something to worry about especially when you may not be keeping pace with the rising cost of so many of the items you buy…if you can find them these days. So now a new one, shadow inflation! What is it?

A person’s lurking shadow, like the shadow inflation lurking in our goods and services

Less Is Not More “Bang for the Buck”

Consumers may be getting less “bang for their buck” as companies have now begun to offer fewer services in lieu of raising prices. Yes, paying the same or slightly more for something, but getting less, can fly under the radar and some companies are starting to figure that out.

Generally, inflation occurs when the price of a good increases, so that consumers pay more for what they could previously purchase for a cheaper price. But there’s another way that inflation can happen, and that’s when you’re paying the same amount, but getting less for your money.

First it was “shrink-flation”. You know, that’s when a can of 6 oz. tuna became a 5 oz. can and so on. Same item, smaller amounts that shrunk are sold at the same price as they were before. That’s now a given when it comes to beating the consumer.

Now it’s “shadow inflation” all around us, especially since the pandemic began. It’s been common for businesses to cut back service in some way because of the pandemic and still continue to charge the same price as they did before. But even with “shadow” trends in place, the Consumer Price Index (which measures price increases in a basket of goods selected by economists) rose by 0.4% in September (vs 0.3% expected) and is up 5.4% from the year before.

Inflation Will Hurt You the Rest of This Year and Well Into 2022

You can see that shipping delays, worker shortages, and increased demand are driving up the cost of goods. Combine that with worker demands for higher pay and you have a recipe for disaster right about now.

What businesses are lurking in the shadows?

Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not only by raising prices), but by taking steps that could give their customers a lesser experience.

A hotel room might cost the same as a year ago, but no longer includes daily cleaning services because of a shortage of housekeepers. Hotels are currently employing about one third fewer housekeeping workers and these jobs may never come back.

Flying lately? I’d be prepared to be bumped more frequently as flights are being cut, waiting longer for a new flight, and perhaps never seeing an attendant for that drink or bag of nuts either. Everything is being cut and costing at least the same or more for that privilege.

Some restaurants are offering limited service, with waiters stretched thin. Customer sentiment on restaurant cleanliness fell 4.2% this year according to Black Box Intelligence which tracks online reviews of 60,000 restaurants. Complaints have been frequent and are increasing.

One way you may see it even occurs at fast food establishments where the soda machines may not all be turned on and the condiments are being only provided upon request and just one or two at a time.

Would-be car buyers are being advised to be flexible on the color and even make and model, lest they face a long wait to get their new wheels. If you are trying to buy appliances, furniture, and other retail goods you are going to wait longer.

My wife and I purchased a new sofa and loveseat as ours was falling apart after 13 years. We ordered it in May. Delivery was postponed five times and we finally got it after waiting almost five months. According to J.D. Power, even at the highest-rated retailers only 57% of customers were able to get customer service within five minutes this year, down from 68% where it was just three years ago.

Shadow Inflation Is Sometimes Hard to See

Government statistics agencies try to take changes in product quality into account when calculating inflation. But that process, known as hedonic adjustment, most commonly applies to physical objects. It is relatively straightforward to estimate the value of the quality of stitching on a shirt or the value of a backup camera on a new car.

But sometimes the quality differences are not as obvious and you don’t see it as clearly. There is a whole world of shadow inflation that leads us in a failure to understand this kind of true inflation. That’s because quality changes involving customer service are ambiguous and hard to measure. No government agency generates a report that will show the quality you get relative to its index.

Will You Be Living with It Forever?

When companies use shadow inflation strategies, it may lead to a permanent way of doing business.

Fast food that takes an awfully long time to arrive, poorly stocked condiment stations, soda machines that are out of order…is this the new normal? Stay in a large hotel chain these days and the large area designated for offering hot breakfast to guests is mostly empty. You may find a few sad mini-boxes of cereal.

For years official inflation measures actually overstated inflation because there were many below-the-radar product improvements not captured by the data. They were things like software that was becoming less buggy for guests to use 24/7. Now the reverse seems to be happening.

When there are shortages of labor or supplies, some businesses adjust mostly or entirely by raising their prices. Others find less obvious, less easily measurable ways to adapt. Consider, for example, rental cars versus hotels. Both were dealing with shortages. But they showed up in different ways.

Car companies just had to charge higher prices, while hotels can take this hit through service quality reductions and get away with it. We measure them in different ways. The car company process is carefully watched and reported in the inflation numbers. The hotel’s problem is mostly relayed by word of mouth and travels slowly.

The Current Market Climate

It is not unusual for businesses to deal with supply shortages through mechanisms other than price increases. Retailers don’t want to attract accusations of price gouging when goods are in short supply, especially in times of natural disaster. So they end up with empty shelves, a backdoor form of rationing.

In the 1970s, gasoline prices skyrocketed, but not enough to prevent long lines and rules around which cars could fill up on which days. I remember those days very well, odd or even plates on your car determined the days you could actually get gas…if you could find it.

This particular economic crisis has had far-reaching consequences that have made economic data harder to interpret than usual. The shock and the economic implications of the pandemic and its costs have become much more challenging to measure than inflation of the past.

Final Thoughts

It would be difficult for government statistics agencies to try to measure these kinds of hidden costs and factor them into inflation.

Customer service in particular is hard to assess. How much good service is worth varies highly among individuals and is hard to quantify. How much extra would you pay for a fast-food hamburger from a restaurant that cleans its restroom more frequently than the place across the street?

What gets up to the level of a quality change is pretty subjective. If the Labor Department even decided they wanted to quality adjust some of these things, they would have an extremely hard time doing it. But you can see it and feel it, can’t you?

When it’s obvious, like with our delayed furniture delivery, you can address it with customer service. In our case, we received a 15% discount simply by asking.

Add shadow inflation to your dictionary and be aware of it. It will cost you, both in the short term and in the long term.

Good old inflation, panflation, shrink-flation, and now shadow inflation. How much more can you take and what can you do about it? All of it just goes to prove that being a good shopper is more important than ever and may be your best defense to fight the “flation” of the day you are up against!

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