Shadow inflation refers to a type of inflation that is difficult to identify in the consumer price index. This is because the price of the good or service may remain the same, but the quality has decreased.
Suppose you check into a hotel, explains Daniel Maninkov, an economic researcher at the University of Michigan. “I used to come to the hotel, greet you, chat with people at the front desk, every morning you get a decently sized continental breakfast, and I sat in the lobby and noticed other guests.
“Now if you check in, there may be a long line, only one agent is overburdened, and breakfast will have limited choices. You will be sitting alone with the nearest table a few meters away from you.”
The hotel may also have dropped their daily housekeeping services due to COVID risks or staffing issues (or both). And gym access may be limited, so sign up for a slot instead of just showing up. And maybe because of social distancing, you’re lining up six feet away at the check-in counter, and now the line swings outside where it’s cold and raining.
These small changes accumulate and are difficult to measure. But at the end of the day, you’ll get fewer amenities during your stay – even if the room rate hasn’t changed. This is shadow swell.
The same is happening in a lot of restaurants in the age of COVID. Menu prices may have gone up or stayed the same, but now guests are being asked to move their own tables, or order via a QR code instead of a server.
“Most of these traits are not something our statistical agencies are actively measuring, so they won’t show up, but you will know personally that you are getting lower quality service,” Manaenkov said.
There is also another kind of sneaky inflation going on right now called “shrinkage. That’s when instead of raising prices, the manufacturer is making the product smaller. So a cereal box can go from 19.3 ounces to 18.1 — As was the case with General Mills Pills This year – however the price remains the same, customers are often wiser.
Shadow inflation, deflation, and regular old inflation combined mean your money won’t go as far this year as it did last year. Will things reverse course? If that happens, Manenkov explained, it will happen slowly.
“Consumption patterns are consistent,” he said, meaning that people expect what they have always been given, like a server taking their orders when they are sitting in a nice restaurant. But COVID has forced us to quickly change our ways and adapt our expectations and habits.
“Now that we’ve gone through this stage of breaking down preferences, I think going back – at least for a lot of people – wouldn’t be necessary because people accepted the new format,” Manaenkov said. If customers demand more amenities for their dollars, and there is enough competition there, the market may slowly decline – but that’s not yet clear.