There’s phantom inflation all around us
When there is a shortage of labor or supplies, some businesses adjust primarily or entirely by increasing their prices. Others find less obvious and less measurable ways of coping. Consider, for example, rental cars versus hotels. Both were facing shortages. But they manifested themselves in different ways.
“The automaker only had to charge higher prices, while the hotel could instead suffer the consequences through the quality of service,” Cole said in an email exchange. “We measure them in different ways. The automaker’s problem is measured in terms of inflation, while the hotel’s problem is mostly relayed by anecdotes.
It is not uncommon for companies to face supply shortages through mechanisms other than price increases. Retailers don’t want to face accusations of rising prices when goods are scarce, especially during natural disasters. They end up with empty shelves, a form of back-door rationing. In the 1970s, gasoline prices skyrocketed, but not enough to prevent long lines and rules about which cars could refuel on what days.
This particular economic crisis had far-reaching consequences that made economic data more difficult to interpret than usual. “Usually when there’s a disaster, if you’re a macroeconomist, it’s a stain on the radar screen,” said Carol Corrado, a distinguished senior researcher at the Conference Board who has studied measures of inflation. “But we are talking about a different kettle with the shock of Covid, and the economic implications and costs have become much more difficult to measure than in the past.”
It would be difficult for government statistical agencies to try to measure these hidden costs and incorporate them into measures of inflation, say people who study the data closely.
Customer service preferences, especially the value of good service, vary greatly from person to person and are difficult to quantify. How much more would you pay for a fast food burger in a restaurant that cleans its toilets more often than the one across the street?
“What reaches the level of a quality adjustment becomes quite subjective,” said Alan Detmeister, senior economist at UBS who previously tracked inflation data for the Federal Reserve. “If the Ministry of Labor even decided it wanted to adjust the quality of some of these things, it would be very difficult to do so.”