Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Service Shrinkflation Makes Your Dollar Stretch Less
Transcript
- Lucas: You know that feeling when you open a bag of chips and it's half full of air? That's shrinkflation—the classic kind, where the product gets smaller but the price stays the same. Luna: Right, we've talked about that before. But there's another kind that's sneakier. Lucas: Exactly. Service shrinkflation. Instead of giving you less product, companies just give you worse service. Same price, but you're getting less value. And it's everywhere right now. Lucas: And you know, if unpacking the economy with us has made something click for you, the smallest way to keep this show ad-free is at buy me a coffee dot com slash fexingo. That's it. No pressure. Luna: Yeah, totally. It's what keeps us going. So, Lucas, give me a concrete example of this service shrinkflation. Lucas: Let's start with airlines. You pay the same—or more—for a ticket, but now you're getting charged for checked bags, seat selection, even a soda. Legroom has shrunk. The experience is objectively worse. Luna: And the base fare hasn't come down to reflect that. So your cost per unit of comfort has gone up. Lucas: Exactly. But here's the thing: the Bureau of Labor Statistics—that's the agency that calculates CPI—tries to adjust for quality changes. If a plane seat gets narrower, they estimate how much that 'quality loss' is worth and subtract it from the price increase. Luna: But that's really hard to do accurately. How do you put a number on legroom? Lucas: They use hedonic regression. They look at how much people are willing to pay for extra legroom and model it. But it's imperfect. And for many services, they don't adjust at all. Luna: I just had a personal experience. My gym raised their monthly fee by five bucks last year, but also cut the number of classes from four to three a week. So I'm paying more for less. Lucas: That's a perfect example. The CPI might catch the price increase, but does it capture the fact that you're getting fewer classes? Probably not, because the CPI looks at the price of a gym membership, not the price per class. Luna: So the inflation I actually feel is higher than the official number. Lucas: That's the argument. And it's not just gyms. Look at streaming services. Netflix and Disney+ have added ad-supported tiers. If you want ad-free, you pay a premium. But the old ad-free price was what you used to get for the standard price. So effectively, the service quality dropped for the same money. Luna: And banks too. A lot of banks have eliminated free checking, added monthly maintenance fees, or reduced branch hours. Same account, less service. Lucas: Right. And those fees are explicitly tracked in CPI as 'financial services' but the quality adjustment is minimal. The BLS has a note from 2022 acknowledging that quality change in services is harder to measure than in goods. Luna: Is there any data on how much this adds to real inflation? Lucas: The Cleveland Fed did a study a couple years ago estimating that unmeasured quality decline could add 0.2 to 0.3 percentage points to annual inflation. That might not sound huge, but over a decade it compounds. Luna: So if official CPI is running at, say, 2.5 percent, the real hit to your wallet might be closer to 2.8 percent. Lucas: Right. And in mid-2026, with core CPI at 336.1, up from 335.4 in April, we're seeing steady but moderate inflation. But the quality cuts amplify the sting. Luna: And the Fed's target is based on headline PCE, which was at 131.5 in May. That doesn't factor in service shrinkflation either. Lucas: Exactly. So the Fed might think inflation is under control, but consumers feel squeezed in ways the data misses. Luna: Let's talk about another sector: telecom. Internet and phone plans. They've gotten more expensive, but also they've added throttling, data caps, and hidden fees. Lucas: Yes. The price per megabit has fallen dramatically over the years, but your monthly bill has gone up. And if your data gets throttled after a certain cap, you're getting a worse service for the same price. Luna: So it's like the opposite of Moore's Law: you pay more and get less. Lucas: At least in terms of service quality. What's interesting is that product shrinkflation gets a lot of media attention—the shrinking candy bar, the smaller cereal box. But service shrinkflation is invisible. You don't see it on the shelf. Luna: Because it's about the experience. And experiences are hard to measure. Lucas: Right. And businesses know that. They'd rather cut service quality than raise prices, because customers notice a price hike immediately. A slightly worse experience? They might just grumble and stay. Luna: So what can consumers do? Just accept it? Lucas: Vote with your wallet. Switch gyms, downgrade your streaming plan, call your bank and ask for a fee waiver. But the bigger point is awareness: when you look at inflation, remember it's not just about how much you pay—it's about what you get for it. Luna: And realize that the official numbers might be understating the real cost of living increase. Lucas: Yeah. So next time you feel like your money isn't going as far, but the prices look the same, you might be right. It's just shrinkflation in disguise. Luna: Service shrinkflation. We'll be keeping an eye on it. Lucas: For sure. That's it for today. Catch you next time.