In case you missed the White House memo, the U.S. economy is fantastic. It’s never been better. Stock prices and jobs are booming. Inflation and mortgage rates are falling. Happy days are here again. Yet many Americans remain unhappy. What gives?
One explanation could be that government measures of inflation don’t fully reflect rising prices. Sure, headline inflation is nearing the Federal Reserve’s 2% target, but these statistics can be deceiving.
Shrinkflation, paying the same price for noticeably smaller quantities of the same thing, isn’t appearing only in the grocery aisle. It’s everywhere. Americans may be paying around the same prices as they did a year ago, but they are often getting less.
Take airline fares, which the Labor Department’s consumer-price index shows fell 9.4% during 2023. That sounds nice, until you consider that the calculation heavily weighs the “lowest available fare” for a trip—typically offered by budget airlines, which require customers to pay more to bring a carry-on and select a seat in basic economy. Flyers also get less legroom and a charge for beverages or snacks.
Budget airlines have been slashing their fares to attract more customers, though legacy carriers have also increasingly unbundled their prices to compete. That’s why you’ll have to pay $50 extra if you don’t want to be assigned seat 32B, plus $30 more for a carry-on. Some Americans may like differentiated prices, but most don’t like paying more for the same services they used to get as part of the ticket cost.
But enjoy today’s “low” fares, because they will only go up. Airline labor costs are climbing fast owing to recently renegotiated pilot union contracts. Meantime, low-cost carriers are bleeding red ink. Even JetBlue has run losses in most quarters since the beginning of the pandemic.
Businesses can’t keep running losses without something giving—at least not in a world of normal interest rates. When money was cheap, they could borrow and raise capital at low cost. Many sold products and services at a loss to compete for customers. Recall last decade’s fare wars among ride-share apps like Uber and Lyft.
Alas, the era of free money has ended, and businesses and their investors are prioritizing profitability. That means higher prices.
Consider video streaming services, most of which have been losing money. Several increased prices last fall by around 20%. Disney+’s ad-free service rose from $11 a month to $14. Yet the CPI shows that prices for video subscription services have risen a mere 2% over the last year. How can that be?
Streaming services have recently introduced lower-cost plans with ads. If you don’t want to pay more, you will have to suffer through commercials. Shrinkflation has even come for your Amazon Prime account. The company on Jan. 29 began charging an extra $2.99 a month—or $35.88 a year, a 20% premium over a standard Prime subscription—to stream movies and TV shows without ads.
Companies can’t be expected to subsidize consumers by running losses forever. Investors understandably want to see profits. This is how capitalism works. But it’s still annoying.
Also annoying: rising recurring bills. A few years ago, rising prices on goods, such as used cars, drove inflation. Goods prices have declined in recent months, pushing down headline inflation. But Americans don’t buy cars or appliances every month. They do regularly pay premiums for health, auto and home insurance, which are rapidly rising.
Auto-insurance rates are up 20.3% over the last year, according to the CPI, because costs for vehicle repair, parts and rental as well as litigation have shot up. Insurance premiums typically rise with a lag because they have to be approved by state regulators. Claims costs continue to increase, so prices aren’t done rising.
Healthcare providers are also renegotiating contracts with insurers, which are starting to pass through their increasing costs. Employer health-plan premiums are expected to rise this year by about 6% on average, compared to roughly 3% to 4% over the previous decade. Average family premiums for employer-sponsored plans grew 7% last year.
Why does the CPI show that health-insurance prices dropped 27.1% since December 2022? The Labor Department calculates health-insurance inflation using a convoluted method that relies on retained insurer earnings as a proxy for prices.
Again, inflation numbers don’t tell the full story. As another example, the Federal Reserve’s preferred inflation gauge—the personal consumption expenditures index—takes into account so-called substitution effects. But when you buy chicken because you can’t afford beef, you’re still suffering the effect of inflation.
Liberal economists and Democrats are telling Americans not to be so grumpy because headline inflation has come down. “Our Economy Isn’t ‘Goldilocks.’ It’s Better,” read the headline of Paul Krugman’s New York Times column last week. Maybe it looks that way from 35,000 feet when you’re flying business class—not so much when you’re crammed into seat 32B.