May 6, 2008 at 8:00 AM ET
It's been 25 years since the U.S. has grappled with high inflation -- or has it? There are, after all, two ways to raise prices, but only one involves raising prices. The other involves reducing the value of what you get for your money.
That second method can involve packaging sleight-of-hand, such as reducing the size of a quart jar of mayonnaise by 2 ounces, to 30 ounces. But companies also have an even sneakier way of devaluing your purchases.
Edgar Dworksy, who publishes the Web site Mouseprint.org, chronicles such shrinkage. In a recent post, he reveals that Country Crock margarine recently changed the label on its tubs from “3 pounds” to “45 ounces.” Sure enough, there’s a 3-ounce shrinkage, the same as a 6.25 percent price hike.
One theory for the consistently small rate of inflation – which hasn’t risen above 4 percent for a year since 1991, nor above 6.2 percent since 1982 -- would be that corporations have perfected the art of shrinking packages by these tiny, unnoticed amounts.
But product shrinkage is quantifiable. The Bureau of Labor Statistics' eagle-eyed data gatherers pick these kinds of things up, says Patrick Jackman, who runs the group that calculates the Consumer Price Index. The agency sends out armies of researchers every month who purchase a basket of goods and price them meticulously. It then calculates a price-per-ounce for goods like margarine, so Country Crock's inflation wouldn't go unnoticed, Jackman assured me.
There is another way of raising prices that eludes the governments' secret shoppers, however. Let's call it service "shrinkage." When you are buying a service instead of a good, it's much harder to quantify when something is lost or degraded. But that doesn’t mean it’s not real.
This kind of inflation is most obvious in airline fares. Until recently, a $200 flight from New York to Chicago included meals and baggage handling. Now, meals can cost $10 and a second bag can cost $25. But if the price of the ticket has not changed, these tack-on fees will be missed by inflation spotters. Perhaps an enterprising economist could come up with some way to account for those fairly specific degradations, but there are many more ways airlines now ding you.
For instance, flight times are longer now, Jackman noted, but there's no credit for a passenger's lost time. What used to be a 90-minute flight is often now listed as a 110-minute flight by an airline, in part to account for air traffic control slowdowns and the like. That's fair, but it clearly devalues the ticket. Now, consider the miserable on-time ratings for most airlines. I was recently on a flight from New York to Utah that had a published on-time rating of 10 percent! Doesn't chronic lateness also devalue the service you’ve purchased?
Or more to our current topic, isn't that a form of inflation?
Inflation by degradation
Since I write a lot about broken technology, I think a lot about headaches that are caused by things that don't work. How many hours each month do you lose to dropped cell phone calls? Don't forget to factor in all the miscommunication caused by poor signals and the like. If your cell service has declined, the price of communicating has gone up.
Here’s another example. How much time do you lose to long customer service calls each year? When you buy a product, you are paying for support too. If last year you spent 5 minutes on hold during a typical support call, but this year you spent 15 minutes, that's inflation. It just has a different, not-so-well-known name.
Caroline Baum, an economic columnist for Bloomberg and author of “Just What I Said,” coined a term for this nearly 10 years ago -- inflation by degradation. She notes that because services make up about 60 percent of all economic activity, overlooking the impact of degraded services is a serious flaw in calculating the inflation rate.
In 2001, after a frustrating bout with a customer service representative, she ranted in her column that government statisticians "ought to seriously consider how to capture what every consumer knows is generalized deterioration in service in the information age."
If you think about it, you can probably find examples of reduced service and corner cutting all around your life. Share a few with other readers at the bottom of this story, if you like.
You are getting more for your money, so stop complaining
I'm not saying companies shouldn’t save a few pennies here and there during difficult economic times. The problem is: How do we account for that? And how does our government account for that? If we are continually paying the same for less, it's insulting to be told we are in the golden era of low inflation.
The federal government explored this issue 10 years ago and concluded that Americans were actually getting more for their money as time passed. In fact, the research published by the Boskin Commission, which studied the impact of "quality changes" on consumer prices, concluded that inflation was overstated by 1.1 percent each year. The Bureau of Labor Statistics wasn't doing a good enough job giving companies credit for product improvements, it said. The commission argued that automobiles, for example, are a much better value today than 10 years ago because they break down less often, need fewer tune-ups and are safer, while prices have remained relatively constant.
In other words, you are getting more for your money, so stop complaining.
Partly as a result of the commission’s work, the Bureau of Labor Statistics began using mathematical models called “hedonics” to reflect some of those quality improvements.
But, Jackman notes, nothing has been done to pick up service degradation and include it in the inflation calculation.
"There was an assumption (in the Boskin report) that all this quality change was one direction. It's not," he said.
No accounting for lost time
This is no esoteric, academic exercise. Major government expenses, such as Social Security payouts, are impacted by the inflation rate. A lower rate means lower cost of living adjustments. And when other government expenses indexed to inflation are considered, a lower inflation rate also has a big impact on the federal deficit and debt. That in turn, affects the stock market, the strength of the U.S. dollar, and many other important economic vital signs. So the federal government has some incentives to keep the rate low.
But don't instantly subscribe conspiracy theories about the alleged deflated inflation rate. There is a simpler explanation. Accounting for loss of services or lost time for consumers is an incredibly tricky proposition. In fact, Jackman says he really has no idea how to do it.
“In an ideal world you could treat these things by assessing the cost of time lost and that kind of thing, and value it, and incorporate it,” he said. “But at this stage I don't think we have any idea of how to do that."
What price would you put, for example, on an hour of lost time? To a McDonald's employee, that's worth about $10; to a high-priced lawyer, about $300. Meanwhile, how would you count lost time? And, to be fair, how would you balance it with time gained that's not currently spent sitting in the waiting room at an auto-repair shop?
I've noted before that the most serious problem with consumer protection law is that it rarely makes any accounting for time. Sure, identity theft victims rarely lose money in the end, but they often lose countless hours to frustration, and receive no compensation. When a company causes a consumer harm by selling a defective product, and then forces that consumer to wait many weeks for a replacement and to spend hours filling out forms, the extra time is simply lost.
This same oversight applies to the problem of tracking prices. Companies now know that they can spend endless hours of our time without impunity, and so they do. When they look for ways to save money, they simply shift costs in the form of time onto consumers. And right now, there is little we can do about it.
Where does lost time go? Economists rather coldly talk about time choices that consumers make as a “labor-leisure” choices. Time lost to late flights and corporate fights generally eats into precious leisure time that would have been better spent having dinner with the family, gardening or getting exercise. That means inflation by degradation is a much more serious problem than simply an gap in government data.
Can you think of a way that companies have stolen your time recently that you might consider a hidden form of inflation? Share it below.