Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / The Hidden Inflation in Service Quality Cuts
Transcript
- Lucas: You know that feeling when you check into a hotel and the room is clean, but the housekeeping only comes every third day now? Or you grab a coffee and the pastry is noticeably smaller, yet the price hasn't budged? Luna: Oh, absolutely. I've noticed that at my local café — the croissants have definitely shrunk, but they're still four-fifty. Lucas: Right, and that's exactly the kind of inflation that CPI struggles to catch. The headline numbers we saw in the May CPI report — all urban consumers index at 334.0, core at 336.1 — they track price changes for a fixed basket of goods and services. But they don't easily capture the quality or quantity you get for that price. Luna: So you're saying if the croissant shrinks by ten percent but stays the same price, CPI might not register any inflation at all? Lucas: Exactly. The statisticians try to adjust for quality changes, but it's really hard to measure. A smaller croissant is still a croissant. And in services, it's even trickier — how do you quantify a hotel room that's cleaned every third day instead of daily? The price per night might be unchanged, but the value dropped. Luna: That's a form of 'shrinkflation' but for services. I've seen this in airlines too — legroom keeps shrinking, checked bags cost extra, and the 'free' snack is now a bag of pretzels the size of a postage stamp. Lucas: Right. Airlines are masters of this. They unbundle everything. The base fare might not rise much, but you're paying more for the same total experience. And the CPI captures the base fare, but it's harder to adjust for the fact that you used to get a meal, a checked bag, and a bit more legroom included. Luna: And it's not just travel. Restaurants are doing it too — smaller portions, lower-quality ingredients, or replacing waitstaff with tablets for ordering. Lucas: Exactly. That's a big one — labor substitution. When a restaurant replaces a human server with a self-service kiosk, the menu price might stay the same, but the service quality drops. CPI doesn't capture that decline in service because it's not measuring the 'service' component directly. It measures the price of the meal. Luna: So the inflation we feel in our daily lives might be higher than the official numbers suggest, because we're getting less for the same money. Lucas: That's the thesis. And it's especially relevant right now because the job market is cooling. The June payrolls report showed only 57,000 jobs added, and the unemployment rate ticked up to 4.2 percent. The labor force participation rate dropped to its lowest in fifty years outside the pandemic. Luna: So companies are finding it harder to hire, and instead of raising wages or prices, they're cutting quality? Lucas: Partly. Or they're automating. If you can't find enough cleaners for your hotel, you reduce cleaning frequency. It's a way to manage costs without explicitly raising prices, which might scare off customers. And in a tight labor market — well, it was tight until recently — this became a common strategy. Luna: But now the labor market is loosening. Does that mean we might see a reversal? More service, fewer kiosks? Lucas: Probably not quickly. Once a company invests in self-service kiosks, they're not going to tear them out. And customers have gotten used to them. The genie is kind of out of the bottle. But the broader point is that official inflation measures might be underestimating the true cost of living because they miss these quality and quantity adjustments. Luna: And that has implications for the Fed. If they're targeting core PCE at 2 percent, but the real inflation people experience is higher, then policy might be too loose. Lucas: Right. The Fed uses PCE, which does incorporate some quality adjustments, but it's far from perfect. And the 10-year breakeven inflation rate is around 2.23 percent — that's the market's expectation of average inflation over the next decade. But if hidden quality cuts are adding, say, half a percent to effective inflation, then the true rate might be closer to 3 percent. Luna: That's a big gap. So what can consumers do? Just accept that our croissants will keep shrinking? Lucas: I think awareness is the first step. When you see a price freeze, ask yourself what else changed. Is the portion smaller? Is the service worse? Are there new fees? And vote with your wallet — support businesses that are transparent about what they're offering. But it's hard, because these cuts are often invisible until you've already paid. Luna: Speaking of things that make a real difference — and this is a bit of a tangent but it connects to value — we keep this show ad-free, and listener support is what makes that possible. A couple of dollars a month genuinely keeps the lights on, if you've gotten something out of the episodes. Lucas: Totally. If walking through the economy with us has made something click, you can find us at buy me a coffee dot com slash fexingo. It's a small way to ensure we keep digging into these hidden corners of inflation. Luna: Yeah, every bit helps. And now back to the shrinking croissants. Lucas: So one specific example I want to drill into: the hotel industry. After the pandemic, many major chains like Hilton and Marriott introduced 'daily housekeeping upon request only' policies. That wasn't just a Covid safety measure — it's become permanent. A 2024 survey found that nearly 70 percent of hotels now offer housekeeping only every other day or less. Luna: And the price per night has gone up or stayed flat, so CPI sees no inflation there. But you're getting fewer services for the same money. Lucas: Exactly. And this is hard to adjust for. The Bureau of Labor Statistics does try to quality-adjust, but it's based on detailed characteristics. If a hotel removes daily housekeeping, it might not be captured until the next revision of the CPI basket, which can take years. Luna: So there's a lag. Meanwhile, consumers feel the pinch, but the data says inflation is tame. Lucas: And that feeds into the narrative that 'official inflation is understated.' Which, to be fair, has been a critique for decades. But in the current environment — with gold at $4,169, up 3.6 percent in five days — some of that might be a hedge against exactly this kind of hidden inflation. Luna: Gold is signaling that investors don't fully trust the official numbers. Lucas: Among other things. But it's a data point. And silver is up even more — 4.8 percent. So there's a real concern about purchasing power erosion that goes beyond what CPI shows. Luna: So what about the Fed? If they acknowledge this hidden inflation, would they need to keep rates higher for longer? Lucas: Potentially. The Fed funds rate is at 3.63 percent, which is already restrictive. But if effective inflation is 3 percent or higher, that means real rates might not be as high as they seem, and the Fed might have less room to cut. That's a big debate in markets right now. Luna: Interesting. So the next time I see a 'price unchanged' sign, I'll look a little closer at what's actually inside. Lucas: Exactly. And if you find a place that still gives you a full croissant and daily housekeeping, hold onto it. That's becoming a luxury.