November 20, 2021
Yesterday I heard a piece on NPR in which they highlighted “skimpflation.” This is where there is a deterioration in service quality, like long waits for service at a restaurant, which are not picked up in our standard measures of inflation. The implication is that the Consumer Price Index (CPI) is understating the true rate of inflation that people are seeing.
I had mixed feelings on hearing this report. On the positive side, I had made arguments like this a quarter-century ago, when the party line (the views of the elites in both political parties) was that that the official CPI overstated inflation.
The issue then was that there was a concerted effort to cut Social Security benefits. There is an annual cost-of-living adjustment (COLA) for Social Security that is tied to the CPI. The goal at the time was to reduce this COLA so that the government paid out less in Social Security.
The target was 1.0 percentage points. That may not sound like much, but the fall would accumulate through time. After ten years of getting 1.0 percent less each year, a retiree’s benefit would be 10.0 percent less. After twenty years, it would be 20.0 percent less. (The actual reduction would be somewhat less due to the effect of compounding.)
Many of the big names in the economics profession were mustered together in the effort to cut Social Security benefits, with the Senate Finance Committee assembling the “Boskin Commission” to lead the charge. I was rather lonely in my efforts to question their assessment.
In addition to pointing out that much of the evidence that the CPI overstated inflation was weak, I also tried to call attention to ways in which it understated inflation. Some of these would fit the definition of today’s “skimpflation.” (Anyone interested can find this in my book, Getting Prices Right.)
For example, I pointed out that average capacity utilization in airlines went from around 75 percent in the 1970s to well over 90 percent in 1990s. This meant that you would rarely have a middle seat filled in the 1970s, to a situation where three people in a row would be standard in the 1990s. This loss of space (coupled with smaller seats and less distance between rows) was a deterioration in quality not picked up in the CPI.
There were similar stories in other areas. The NPR piece talked about reduced service in stores that had fewer salespeople. That was also a story in the 1990s as Walmart and big box stores were replacing neighborhood stores that might have had more clerks available to answer customers’ questions.
Anyhow, there was little media interest in these sorts of skimpflation issues back in 1990s since it went against the story that the media wanted to push. Social Security was in their cross-hairs and they were not interested in publicizing arguments that might undermine the cause (cutting benefits).
Today, they have the opposite cause. The major news outlets are pushing the inflation argument even when it means misrepresenting the true rate of price increases, distorting the story on real wages, and ignoring the benefits to low and moderate-income families from the child tax credit.
Of course, skimpflation does refer to something real in the world, we have seen a deterioration in the quality of many services. But, if we want to try to discuss this as unmeasured inflation we have to think about it a bit more seriously.
In 2020, many of these services weren’t available at all in many places for much of the year. For example, restaurants were closed or did not have indoor seating. There would seem like a serious deterioration in service quality. Also, my guess is that southern Utah is not the only place in the country that had shortages of many items on store shelves last year.
Inflation is a measure of change in prices. If we want to say that deteriorating service quality and shortages of various items are a source of unmeasured inflation then we have to say that the story is worse today than it was last year or at some prior point. (Unless the point is that the media neglected all this inflation that occurred when Donald Trump was in the White House.)
If the media have some studies that can show how this deterioration has increased over time, it should share them. Many of us econ nerd types would be very interested in getting a good measure of this sort of quality deterioration.
But let me throw out a simpler proposition. Suppose that at some point, say six to eight months down the road, we no longer see restaurants short-staffed and shortages of random items in stores or on Internet sites.
Can we count on NPR and other news outlets to call attention to this unmeasured improvement in service quality, in effect, “skimpdeflation?” The whole world is waiting.