Shadow inflation: What it is and how you’re already paying it

US & World News

One sector shadow inflation is taking place is travel. Travelers are facing more restrictions and receiving fewer amenities – without necessarily seeing a price cut. (Photo: Getty Images)

(NEXSTAR) – Inflation means the price of just about anything and everything is going up right now. It’s obvious at the gas pump and the grocery store. But there’s a sneakier force at play, too – a force economists are calling shadow inflation.

Shadow inflation refers to a type of inflation that is much harder to capture in the consumer price index. That’s because the price of a good or service may stay the same, but the quality has gone down.

Say you’re checking into a hotel, explains Daniil Manaenkov, economics researcher at the University of Michigan. “You used to come into a hotel, get greeted, chat with people at reception, every morning you got a decent sized continental breakfast, you sat in the lobby and observed other guests.

“Now if you check in, there might be a long line, there’s just one agent who’s overworked, your breakfast is going to have limited selection. You’ll be sitting alone with the nearest table a few meters away from you.”

The hotel may have also dropped daily room cleaning services because of COVID risk or staffing issues (or both). And maybe there’s limited access to the gym, so you have to sign up for a time slot instead of just showing up. And perhaps because of social distancing, you’re lining up six feet apart at the check-in counter, and now the line snakes outside where it’s cold and rainy.

Those small changes add up and they’re hard to measure. But at the end of the day, you’re getting fewer amenities during your stay – even if the room rate hasn’t changed. That’s shadow inflation.

The same thing is happening at lots of restaurants in the COVID era. Menu prices may have gone up or stayed the same, but now guests are asked to bus their own tables, or order via a QR code instead of with a server.

“Most of these attributes are not something that our statistical agencies are actively measuring, so it’s not going to show up, but you’ll know personally you’re getting a lesser quality service,” said Manaenkov.

There’s also another sneaky type of inflation going on right now called “shrinkflation.” That’s when instead of raising prices, a manufacturer makes the product smaller. So a cereal box could go from 19.3 ounces to 18.1 – as was the case with General Mills cereals this year – yet the price remains the same, and customers are often none the wiser.

Shadow inflation, shrinkflation and regular old inflation combined means your money just isn’t going as far this year as it was last year. Will things reverse course? If it does, it will happen slowly, Manaenkov explained.

“Consumption patterns are sticky,” he said, meaning people expect what they’ve always had, like a server taking their order when they’re seated at a nice restaurant. But COVID forced us to change our ways and adapt expectations and habits quickly.

“Now that we have gone through that phase of breaking preferences, I think going back – at least for a lot of people – will not be necessary because people have accepted the new format,” Manaenkov said. If customers do demand more amenities for their dollars, and there’s enough competition out there, the market may shift back slowly – but that’s yet to be seen.

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