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There Is Shadow Inflation Taking Place All Around Us

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A menu in the form of a QR code at a cafe in Paris on Sept. 11, 2021. (Dmitry Kostyukov/The New York Times)

A menu in the form of a QR code at a cafe in Paris on Sept. 11, 2021. (Dmitry Kostyukov/The New York Times)

Inflation has surged in 2021, with various official measurements of consumer prices rising faster than they have in years. But in a crucial respect, the data may be understating things.

Many types of businesses facing supply disruptions and labor shortages have dealt with those problems not by raising prices (or not by only 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 include daily cleaning services because of a shortage of housekeepers. Some restaurants are offering limited service, with waiters stretched thin. 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.

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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 about the cleanliness of tables, floors and bathrooms. Satisfaction with customer service was also down, especially regarding beverages, with guests complaining more about receiving the wrong order or no drink at all.

People trying to buy appliances and other retail goods are waiting longer. 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% in 2018.

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, say, the quality of stitching on a shirt or the value of a backup camera on a new car. There is a whole world of inflation alarmists who argue that this process leads to the understating of true inflation.

But quality changes involving customer service can be ambiguous and hard to measure. The Bureau of Labor Statistics, which generates the Consumer Price Index, does not incorporate quality adjustment on 237 out of 273 components that go into the index, including the vast majority of services.

Alan Cole, a former staffer for Congress’ Joint Economic Committee who writes the newsletter Full Stack Economics, noticed these sorts of annoyances during a long drive through the Northeast this summer — fast food that took an awfully long time to come, poorly stocked condiment stations, soda machines that were out of stock. The dynamic became even more clear to him when he stayed in a hotel that had a large area designated for offering hot breakfast to guests — it was mostly empty, with a few sad mini-boxes of cereal.

For years, he had argued that official inflation measures actually overstated inflation, because there were many below-the-radar product improvements not captured by the data, like software that was becoming less buggy. Now, he concluded, the reverse seemed 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.

“The car company just had to charge higher prices, while the hotel could take the hit through service quality instead,” Cole said in an email exchange. “We measure them in different ways. The car company’s problem gets measured as inflation, while the hotel’s problem is mostly relayed by anecdote.”

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.

This particular economic crisis has had far-reaching consequences that have made economic data harder to interpret than usual. “Usually when there is a disaster, if you’re a macroeconomist it’s a blip on the radar screen,” said Carol Corrado, a distinguished principal research fellow at The Conference Board who has researched inflation measurements. “But we’re talking a different kettle of fish with the COVID shock, and the economic implications and costs have become much more challenging to measure than in the past.”

It would be difficult for government statistics agencies to try to measure these hidden costs and factor them into inflation measures, say people who study the data closely.

Customer service preferences — particularly 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 adjustment does become pretty subjective,” said Alan Detmeister, a senior economist at UBS who formerly tracked inflation data for the Federal Reserve. “If the Labor Department even decided they wanted to quality-adjust some of these things, they would have an extremely hard time doing it.”

In some cases, one person’s quality enhancement is another’s deterioration. Is online check-in at a hotel a desirable timesaving feature, or a loss of personal touch that has real value? Reasonable people can disagree.

Moreover, while there appears to be some shadow inflation in service industries, the reverse has arguably held true for many years.

Suppose you believe that restaurant food has become more varied and delicious over the last few decades, as chefs have become more skilled and creative. If so, maybe the 2.7% average annual inflation in full-service restaurant prices from 2000 to 2019 that the Bureau of Labor Statistics reported was too high.

It’s plausible to believe that’s true, and also that the 4.9% rise in those prices over the 12 months ended in August was too low if the effects of labor shortages had been fully accounted for.

This hints at why inflation bothers people so much — and why it’s a political minefield for the Biden administration. It’s not just the prices you see and the numbers that are fed into economic models, or the news headlines and central bank inflation targets.

It’s also that a given amount of spending buys experiences that are a little less satisfying, and that this adds up to an accumulation of frustrations that don’t necessarily show in the numbers.

© 2021 The New York Times Company


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Pritzker says balanced budget, ‘big things’ remain priority ahead of second term

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Inflation, crime, pandemic response, abortion rights and Donald Trump are all set to be major issues in the 2022 race for Illinois governor, if the winning candidates’ election night speeches are any guide.

“(Gov. JB) Pritzker doesn’t understand how skyrocketing gas prices and soaring food prices make everyday life harder for Illinois families like you and I,” Darren Bailey, the Republican nominee for governor, said in an election night victory speech.

A farmer and state senator from downstate Xenia who acknowledged to the Chicago Sun-Times this week that he is a millionaire, Bailey received the endorsement of former President Donald Trump and coasted to an election night victory with 57 percent of the vote, compared to about 15 percent for each of the next two closest competitors.

“He doesn’t understand how his and Joe Biden’s extreme national agenda helps fuel inflation and increases utility bills for families like us across Illinois,” Bailey added of the governor. “He doesn’t understand the damage that his lockdowns did to small businesses, schools, mental health and working families all across this state. He doesn’t understand that his war on police has fueled the war on our streets, making our neighborhoods dangerous all across this state.”

Bailey also said in his speech that he entered politics because he was displeased with his local representatives’ votes to end a historic two-year budget impasse in 2017 by raising the income tax rate to 4.95 percent, a level slightly lower than it was when the impasse began two years prior.

The income tax vote was part of the budget package that saw Democrats and Republicans come together to override the veto of former Republican Gov. Bruce Rauner.

Pritzker, meanwhile, considers it part of his first-term legacy that Illinois has left the politics of the impasse behind it and taken strides to balance the budget each year and pay down old debt.

The governor sat for an interview with Capitol News Illinois Thursday amid a two-day blitz in which he spoke with political reporters from across the state.

He said fiscal prudence – along with pandemic-era revenue spikes that were seen nationwide for many reasons – allowed him and lawmakers to pass $1.8 billion in tax relief this budget year, some of which took effect July 1.

It included a one-year suspension of the 1 percent grocery tax, a six-month delay on a 2-cent motor fuel tax hike, a 10-day partial sales tax holiday on back-to-school items from Aug. 5-14, a permanent expansion of the earned income tax credit, an additional $300 in property tax credit, and direct payments to Illinoisans at $50 per person and $100 per dependent child.

“Those are all things that we Democrats did and were able to do because Democrats balanced the budget, Democrats eliminated the bill backlog, Democrats got the credit upgrades for the state,” he said, referring to double upgrades the state has received from the three New York bond rating agencies in the past year.

“You can’t do any of those items of tax relief if you don’t have the dollars to do it,” he added. “And we had surpluses and what did we do? We provided relief to working family. And we’re gonna look to do that going forward. I might add, if you keep on the path that Democrats have set, that I’ve set, balancing budgets and having surpluses, we can do much more.”

He said he’s hopeful to continue balancing the books even though the state expects revenues to slow as pandemic-driven spikes normalize.

Pritzker touted the state’s use of unexpected revenues for one-time purposes, such as putting $1 billion in the budget stabilization fund, funding pensions $500 million above what is required in law and paying down old health insurance bills amounting to about $900 million.

He also noted the state has, under his watch, increased investments in the Illinois State Police, crime labs, expressway cameras, and youth violence intervention programs.

The one-term incumbent who unseated Rauner with a 16-point victory in 2018 also touched on his spending in the Republican primary in recent months.

While he spent money through his own campaign committee, the Democratic Party of Illinois and the Democratic Governors Association to knock Bailey’s chief primary rival, Aurora Mayor Richard Irvin, he downplayed the role his money played in that election.

Irvin’s camp has pegged the combined spending of those entities in the GOP primary at roughly $36 million.

“My message is a general election message against all of the Republicans,” he said. “You know, we had messages about the candidate who was talking about corruption in Illinois, when he himself was involved in corruption. We had messages about the candidate who is truly extreme on every issue, including choice. And, you know, we’re fighting the Republicans, this is about Democrats beating Republicans.”

In the coming days, Pritzker said he will call lawmakers back to Springfield for a special session to secure abortion rights, which could include increasing the number of medical professionals who can perform abortions. It will not include providing state aid for people traveling to Illinois to receive an abortion, he said.

In terms of a second-term agenda, Pritzker said continuing the fiscal practices of his first term, as well as increasing subsidies for education and child care are among his priorities.

“But I think that looking back at my first term in office, gives you an idea that we’re gonna get more big things done, and they’re going to be about lifting up working families,” he said.

You can listen to the full episode of Capitol Cast here.

Capitol News Illinois is a nonprofit, nonpartisan news service covering state government that is distributed to more than 400 newspapers statewide. It is funded primarily by the Illinois Press Foundation and the Robert R. McCormick Foundation.

Copyright 2022 WSIU Public Radio. To see more, visit WSIU Public Radio.




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Deals, delays and COVID rules: Tips for travelers booking a getaway for summer and fall | Ap

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Experts offer these tips for traveling this summer and fall:

— If you see a deal you like, take it. It may not last.


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Happy Fourth of July!! – Corruption, Crime & Compliance

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To all of our clients, colleagues, family and friends, we wish you a Happy Fourth of July.

While we live in a difficult and troubling time, please take a moment to embrace gratitude and respect for all those who have sacrificed to secure our freedoms. Together, we can continue America’s unique history of freedom.

Have a terrific holiday!!


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