Inflation decreases the value of your money. Prices for everything that you buy go up. Gasoline goes up from $2 per gallon to $4 per gallon. A pound of chicken increases from $2 per pound to $2.50 per pound.
These are examples of inflation raising prices you can see every day. You see the prices, and you know how much you're paying. However, there's another kind of inflation that you can't see but increases the cost of living nevertheless.
Video of the Day
This unseen increase in the cost of goods and services is known as shadow inflation. But what is it, and how is it measured?
What Is the Consumer Price Index (CPI)?
Let's start with how the government measures inflation.
The U.S. Bureau of Labor Statistics measures inflation in the economy with the Consumer Price Index. The CPI represents the prices of a basket of goods and services consumed by most households. It includes the costs for food, housing, energy, commodities, health care and transportation.
However, the CPI is ambiguous and isn't giving you the full story. It isn't reporting the increase in costs that results from the decline in quantity and quality of customer service from shadow inflation.
Consider also: How to Calculate the Inflation Rate From the CPI
What Is Shadow Inflation?
Shadow inflation is when you pay the same price for a good or service, but the quantity or quality has gone down. Therefore, you're getting less for your money, but the actual increase in cost is hard to measure. There isn't a government statistic that measures quality in relation to cost.
Consider also: What Percentage of Salary Should be Spent on Food and Clothing?
Examples of Shadow Inflation
Here are a few examples where you might be experiencing shadow inflation.
Hotels: Hotel rooms aren't being cleaned as often or as well. They're cutting back the number of cleaning employees to reduce costs.
Some hotels used to offer a free breakfast that consisted of a buffet with hot scrambled eggs and bacon. Now they only put out bowls of cold-boiled eggs and a few mini-boxes of cereals. But the cost of your room stays the same.
Restaurants: The quality of service at restaurants has gone down. Eating areas and restrooms aren't being mopped and cleaned as often. Condiments at restaurants are not being refilled. Not all soda machines are working.
Some restaurants now have tablets on tables to place orders. No waiters. Then you get to check out using the kiosk, and they give you the opportunity to add a tip. For what conveniences is a tip deserved?
Contractors: Suppose you hire a contractor to install an electrical outlet, and they cut a hole in your drywall. The contractor may charge you to repair the drywall and add an additional charge to clean up the dust from the cutting. Before, a contractor would include these services in the estimated cost of the job. Now, they're additional charges.
Contractors used to give estimates for free. Now they charge $25 or more but will subtract the cost from the price of the job if you give them work.
Dry cleaners: Dry cleaners used to separate different kinds of clothes in individual bags – sweaters in one bag, pants in another. Now you get everything in one bag.
Retailers: Retailers don't want to be accused of price gouging, so they cut back on inventory and end up with poorly stocked shelves. Appliance and furniture retailers have reduced their inventories but will take your order for delivery in several months.
Car dealers: At car dealerships, you no longer have the choice of options that you previously had. For example, if you want a silver car, the salesperson may tell you that you'll have to wait four to six months to get that color. However, you can have a beige or purple car that's on the lot.
- Forbes: Shadow Inflation Could Be A Bigger Problem Than You Realize
- Yahoo!Finance: 'Shadow Inflation' Is 'All Around Us,' Economist Explains
- The Seattle Times: There is Shadow Inflation Taking Place All Around Us
- ShadowStats: Shadow Government Statistics
- Forbes: How Inflation Erodes The Value Of Your Money
- U.S. Bureau of Labor Statistics: Consumer Price Index