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The inflation that nobody measures

Published at: 31-08-2018

Posted on: August 31st, 2018 by RaduC No Comments

Measuring inflation by keeping an eye on a basket of goods and services is not infallible. And that is not only due to the one-year delay in updating the consumer basket`s contents or because the contents vary with the population group. There are plenty other sources of distorting the real value of inflation.

A frequent complaint against measuring inflation in this way is that it does not count the improvement of product quality and ends up comparing apples and oranges. For example, tracking TV prices leaves out the spectacular technological advances that occurred with time. In other words, inflation is overvalued given that similar amounts of money can buy increasingly better products. A remark that holds true first and foremost for hi tech products.

There is, however, another somehow opposite phenomenon. It goes by the name “shrinkflation”. The term is known as defining a hidden form of inflation where prices are artificially kept unchanged by shrinking the quantity of items that can be bought for the same amount of money. Had the items quantity stayed the same, the price would have gone up, and that would translate into the rate of inflation. This does not happen for brand image and competitiveness reasons.

There are some famous cases in this respect described in macroeconomics books. In 2009 the size of the Mars chocolate bar shrank from 62.5 grams to 58 grams as the price remained untouched. Still in 2009 Haagen-Dazs reduced the size of its ice cream tubs, and in 2016 Toblerone shrank the size of its chocolate bars to 360 grams, down from 400.

And what does all that have got to do with Romania, you may wonder. I think it`s safe to say that we are witnessing a similar phenomenon in services which leads to inflation being undervalued.

First off, we must say that services were expected to become a heavy driver of inflation, as, generally speaking, the share of the service sector employment is significantly higher than in production. Due to the increasingly high skilled-labor shortage in Romania, service providers find themselves compelled to increase wages in order to retain staff.  These are rises that can only marginally be offset by other business optimizations or profit margin and cause the prices of services to increase. This is typically seen mainly in developing countries and it is driven by the fact that, unlike products, services are harder to sell abroad which leaves their prices to be dictated rather by local conditions, without feeling any pressure from import products.

All these trends are, however, reflected in the consumer price index based on which the inflation rate is computed. Partly, at least, due to a category of handymen who continue to work on the black market and whose increases in fares are not found in the consumer basket. There is still another phenomenon that inflation fails to capture and which, speaking from experience, is about to gain more ground: lower service quality.

It is based on the “shrinkflation” model, but takes shrinking quality and not quantity as reference, with prices remaining the same. I believe that we have all dealt with this phenomenon that I think is becoming more and more popular. Whether it`s hotels, restaurants, plumbing repairs, construction, land works or medical services, as the best professionals have left to work abroad for better wages, the quality of services provided by the remaining ones is falling. Under these circumstances, a “completed” piece of work requires to be either redone by somebody else or have a shorter life span which in the end has you pay double for the same outcome.

Moreover, faced with increasing demand as the economy overheats, many privately-owned companies have dropped after-sales services which in the end causes the overall quality for the client to fall.

Sadly, if the emigration of the truly professional is not stopped, the inflation driven by poor-quality services will continue to erode our purchasing power without statistics reflecting it. Have you felt that too?

Have a nice weekend!

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