How to Make Inflation Invisible

Americans over 55 are now living through the second bout of serious inflation in their lifetimes. The most conspicuous evidence of that inflation for most Americans has come at the grocery store and the gas station (however, the price of gasoline has retreated considerably since its earlier peak). Although people have exhibited understandable consternation about what appears to be about a 9 percent annual rate of inflation over the past few months, older Americans still recall when the first oil embargo occurred in 1973 and the nation faced annual inflation rates between 5.8 and 13.5 percent for the next 9 years.

Inflation seems straightforward enough. An inflationary economy is typically characterized as one in which the prices for goods and services increase. Since things cost more, the purchasing power of people’s money has decreased, so they are less well off. When prices jump abruptly, as with the price of gasoline and groceries recently, inflation is conspicuous. At other times, though, inflation can be more difficult to spot, for example, when the inflation rate is low, and prices increase quite slowly. When sellers are raising prices, it is usually in their interest to make any increases as psychologically inconspicuous as possible. Two methods for doing so have earned their own names.

Shrinkflation and Skimpflation

The obvious disparity between the massive candy bars that kids collected when trick-or-treating at Halloween in the 1950s and 1960s and the comparatively modest size of those same brands of candy that they, as adults, have been distributing to subsequent generations of trick-or-treaters in the 1980s and since (at, by now, an even higher cost) is an example of shrinkflation.

The conventional characterization of inflation makes a number of tacit assumptions, including that the goods and services in question have not changed. The increased prices of those Halloween candies over the years straightforwardly illustrate that conventional account of inflation, but their progressively smaller sizes over those years exemplify shrinkflation. With shrinkflation, the price may not change and sometimes it may even decrease, but the price per unit has increased. As with periods of low inflation, if the incremental decreases in the amounts of candy are small enough from year to year, this progressive diminishment of purchasing power is more likely to go unrecognized by the consumer.

“Skimpflation” is a more recent coinage that has gained particular popularity during the COVID pandemic. That is because pandemic-induced disruptions to the labor market have made it more difficult for businesses to maintain sufficient staffing. Skimpflation is when services associated with some purchase have decreased or become less efficient, but the price has not decreased proportionately. When the cost of a hotel room remains the same, but housekeeping services are no longer provided every day but only every other day, the customer’s purchasing power has decreased as the result of skimpflation. Probably the best illustration of skimpflation concerning efficiency is the interminable waits consumers so often face on hold when interacting with companies on the telephone.

The Potential Invisibility of Extreme Skimpflation

Skimpflation has been around far longer and extends far deeper into Americans’ lives than they may have realized, for skimpflation not only occurs when services associated with a purchase decrease or become less efficient but, especially, when those services disappear altogether. Call this “extreme skimpflation,” where businesses subtly transform consumers’ expectations about transactions.

Extreme skimpflation is when businesses offload labor onto their customers, who may not even realize it. This seems a trend for which the emergence of the web has only proven a force multiplier. Think about how often the only way to get some services requires that you have a device, reliable access to the internet, the know-how to fathom what are often less than ideally designed websites, and the time to do all of the required work.

Ironies abound. First, when services completely disappear, the resulting extreme skimpflation may be even less easy to detect! Extreme skimpflation may well render inflation invisible much of the time. The often-ignored phrase “some assembly required,” for example, is not innocuous.

Second, extreme skimpflation can produce conditions in which customers become enamored with some of its consequences. A decade ago, Michael Norton and his colleagues discovered what they called the “IKEA Effect.”¹ People tend to value things they have assembled themselves more than if the identical object had been put together in some other way.

Third, over the past two decades, when the inflation rate has appeared to be comparatively modest, some economists have, still, suspected that the government was overstating inflation, because of its failures to allow for the improvements in the quality of products and services, abetted by new inventions such as search engines, smartphones, tablet computers, streaming, etc. Recognition of just how widely extreme skimpflation has spread in the economy, however, suggests that, if anything, the government may have been underestimating inflation instead.