Finitiative’s Monthly post
Inflation
“How hidden inflation is changing everything around us”
by Haseena T.S on November 30
“Inflation is the parent of unemployment and the unseen robber of those who has saved.” – Margaret Thatcher
What exactly is inflation?
It is not merely the rise in commodity prices or rise in wages but also the web that connects the factors which make or break the
economy. As per Philips’ curve, there is an inverse relationship between inflation and unemployment.
When there is wage inflation, the rate of unemployment decreases.
This is because there is a larger demand for laborers while the supply of laborers is scarce. Thus, firms must pay
higher wages to employ more laborers which in turn reduces unemployment. In this regard, inflation, in its true
essence is not vice. However, do these numbers represent the true value? Economists still ponder over this all
these year.
The pandemic has disrupted our economy adversely, resulting in loss of employment and supply chain disruptions.
As a result, demand being higher than supply has led to inflation but there is more to it than how it appears.
The present data of inflation overestimate the numbers.
A hotel room might cost the same a year ago but no longer include daily cleaning services because of the
shortage of housekeepers. The cost of hiring the staff for these services are hidden costs that are not observed
while measuring inflation. Customers pay for service which is not delivered to them with the level of utility
that is expected for the money exchanged for it
Think about it, how much would you pay for a meal at a restaurant that cleans its restroom more frequently
than the place across the street?
These are the questions that need to be addressed. At present, government statistics agencies try to include changes in product
quality into account while calculating inflation. But this process, known as hedonic adjustment,
most commonly applies to physical objects. Since the quality of physical objects can be measured,
such as the mileage covered by a certain car or unique ingredient that makes a delicious hamburger, the real
challenge lies in measuring service quality.
Service quality is intangible by nature and that is the harder problem. The Bureau of Labor Statistics,
which generates the Consumer Price Index, does not incorporate quality adjustment on 237 out of 273 components that are in
the mind including most services, Thus, inflation is overstated, and the accumulation of customer frustrations is not
accounted for in numbers. Next time, when you pay your travel agency or your hotel, contemplate it yourself, is the
price worth it? All you need is a reality check – compare the quality of the service provided against the price
you paid, even if it is subjective, you will realize that inflation is indeed overstated and changing everything around us.
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