'Shadow inflation' is 'all around us,' economist explains

·3 min read

Consumers may be getting less "bang for their buck" as companies have begun to offer fewer services in lieu of raising prices, Alan Cole, former staff for Congress' Joint Economic Committee and policy director at Full Stack Economics.

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,” Cole told Yahoo Finance Live. “I think [shadow inflation is] all around us, especially since the pandemic has started. It's been common for people to cut back service in some way because of the pandemic and still continue to charge the same price.”

The Consumer Price Index, which measures price increases in a basket of goods selected by economists, rose by .4% in September (vs .3% expected) and is up 5.4% from the year before.

This most recent bout of inflation, which began as a more concentrated phenomenon among the automobile, airfare, and clothing industries, has permeated throughout consumer staples and housing/utilities sectors in recent months. A recent Goldman Sachs (GS) report projected home prices to increase by 16% by the end of 2022 thanks to continued strong demand and low inventory.

“While some of the so-called transitory factors like used-car prices, airfares, and apparel continue to ease after sharp run-ups in earlier months, inflation is broadening out,” said Greg McBride, chief financial Analyst at Bankrate.com. “Food and shelter increases together contributed more than half of the seasonally adjusted increase in the CPI. With home prices soaring and rents surging, this may just be the tip of the iceberg.”

A Bankrate survey recently found that 89% of adults have noticed rising prices, and 66% of those noticing higher costs say that they have negatively impacted their personal financial situation.

Even with rising prices at the forefront of the public’s mind, some of the inflation consumers experience has gone under the radar. The products and services being offered in the post-pandemic world are often different from their pre-pandemic versions.

“So look at restaurants, look at hotels, and even look at airfares,” Cole said. “In all of those cases, the products are not quite the same as they used to be. And yet the prices are kind of similar. And if you accounted for all of the differences in quality… and how much you prefer them to their 2019 versions, I think you would find much more inflation than in the estimates put out by the Bureau of Labor statistics. It's just a very hard thing to account for.”

This year’s lower-than-average labor force is a crucial component of many businesses' decisions to raise prices (or keep prices the same for services of lesser value). Estimates have the labor force at a full 5 million to 7 million fewer people than if trends from 2019 had continued.

“And that just means that firms are stretched thin, especially if they're doing additional pandemic safety measures that they weren't doing before,” Cole added. “That's a lot of work to put on a slightly smaller workforce.”

Cole stressed that arriving at accurate estimates for the true toll of inflation is difficult, in part because it requires subjective calls to be made on the part of economists on what a good is worth and whether new versions of a good are of equal value as older versions.

“When it comes to how inflation is doing over 2020 to 2021, I would say that inflation was much worse if you fully accounted for all of the quality losses that we suffered during the pandemic,” he said. “But if the pandemic goes away and hotels and airlines get down their hold time, start doing things like offering fresh towels again and offering room touch-ups, then I would say that that's a shadow deflation.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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