The New York Times addresses our shadow inflation thesis

Declining service quality means consumers are getting less for their money.

(Image by Piviso)

Last month, I argued that the quality of service at a variety of businesses has declined since the onset of the pandemic. This was made starkly clear to me when I had a meager breakfast in a hotel dining room that was obviously designed for a much more majestic spread.

Many readers chimed in with similar anecdotes. In a column for the New York Times, Neil Irwin does one better: after generously citing my piece, he marshals objective evidence supporting its thesis.

A hotel room might cost the same as a year ago — but no longer include daily cleaning services because of a shortage of housekeepers. Some restaurants are offering limited service, with waiters stretched thin. Would-be car buyers are being advised to be flexible on the color and even make and model, lest they face a long wait to get their new wheels.

Customer sentiment on restaurant cleanliness fell 4.2 percent this year, according to Black Box Intelligence, which tracks online reviews of 60,000 restaurants. Complaints have been frequent about the cleanliness of tables, floors and bathrooms. Satisfaction with customer service was also down, especially regarding beverages, with guests complaining more about receiving the wrong order or no drink at all.

People trying to buy appliances and other retail goods are waiting longer. According to J.D. Power, even at the highest-rated retailers, only 57 percent of customers were able to get customer service within five minutes this year, down from 68 percent in 2018.

In theory, inflation measures should adjust for quality. But Irwin rightly notes that it isn’t possible to measure all the differences between every single thing sold anywhere⁠. We instead put large groups of not-quite-the-same services into the same category, and measure their prices as a group.

This is an especially serious problem in services. The 2021 version of many services isn’t quite the same as the 2019 version. But statisticians have treated them as the same, even though some of them have gotten dramatically worse, because they don’t have a rigorous way to measure how much worse they’ve gotten. The result has been extra inflation on an unmeasured quality dimension: rather than paying more for the same good, in many places, you instead pay the same for something less than what it used to be.

Inflation estimates are subjective—especially now

Irwin’s column explores some interesting ideas I didn’t discuss in my original piece. For example, UBS’s Alan Detmeister told Irwin that quality adjustment is frequently a judgment call. It’s worth pondering the wide-ranging implications of that.

Economists make heavy use of statistics like real GDP growth to compare how the economy changes over time. These depend on the measured inflation rate.

This means that every economic comparison across time is at least a little bit made up. This is particularly true over long time periods. There is no ironclad measure of whether John D. Rockefeller’s historical wealth was greater than Jeff Bezos’s wealth today. There’s no purely objective way to measure how much richer the average American has gotten since 1970.

The virtue of our current system of inflation adjustment is that it’s relatively systematic. Whatever biases it might have, it applies them consistently each year. And because the economy tends to evolve fairly gradually from one year to the next, the impact of those biases is fairly consistent from one year to the next, and the measure is directionally useful.

But 2020 and 2021 have been unusual, one-off years. There hasn’t been as much methodological consistency with prior years, since the rate of product substitutions has been much faster. So when the Bureau of Labor Statistics says the inflation rate was 5.3 percent over the last 12 months, we should view that as much more debatable, and much less commensurate with past results, than we would in a normal year.

A shift in power from buyers to sellers

Irwin brings up another thing worth thinking about: a change in the balance of power between producers and consumers. “A given amount of spending buys experiences that are a little less satisfying,” he writes.

Throughout most of the 2010s, the economy was a buyer’s market. If you had cash, you could easily find people eager to work for you or provide you with services. But it wasn’t always easy to get a job, and it wasn’t easy for businesses to drum up sales.

In 2021, we have the converse: the whole economy is a seller’s market. People with real goods or a house to sell can easily find willing buyers. Workers can find a lot of would-be employers. But people with cash in hand often find themselves waiting for an opening on the seller’s busy schedule.

This margin⁠—who waits around for whom⁠—is one of the telltale signs of whether the economy is running cool or hot. Right now, all signs point to hot⁠. Consumers are spending a relatively normal amount of money, but producers are struggling to navigate the pandemic and fill the orders.