“Stealth Price Hikes” Spreading among Services

President and CRO, RIETI

Because of increasingly serious labor shortages, productivity improvement has become a challenge. What is important now is how to raise the productivity of service industries, which make up a large portion of GDP (gross domestic product).

In the calculation of the rate of productivity growth, the value added used as the numerator of the formula must be expressed in real terms adjusted for the inflation rate. In principle, the price index used for that purpose should be adjusted for quality changes regardless of whether the price in question is the price of a service or a good. For example, in the case of personal computers, if prices remain constant while performance increases, prices are deemed to have declined. However, in the case of services, it is difficult to quantify changes in quality, such as the advances in medical technology. Therefore, in the long term, the rate of increase for service prices tends to be statistically overestimated, while the rate of productivity increases tends to be underestimated.

Although service prices have been stable for many years, they have risen recently against the backdrop of labor shortages. Among the components of the consumer price index, service prices (excluding imputed rents of owner-occupied dwellings) have recently increased around 3% (year-on-year), the highest increase in more than 30 years, except for the periods when prices were affected by consumption tax hikes. The rate of increase for goods prices has slowed compared with some time ago, while the rate of increase for service prices has accelerated. As most services are labor-intensive, service prices are prone to the effects of an increase in nominal wages.

Moreover, the recent rate of increase for service prices may have been underestimated. Regarding food products, for example, a “stealth price hike,” which refers to the practice of effectively increasing prices by reducing product volume while keeping the indicated prices unchanged, has become quite common, and this has been reflected in the price index. On the other hand, regarding services, there are some signs of decline in quality in some cases, such as a longer waiting times, poor customer service, or a slower response to complaints. However, it is difficult to make quality change adjustments that accurately reflect those factors when creating price statistics.

According to a survey conducted by this author, many consumers feel that service quality has declined compared with the pre-COVID-19 period, and this tendency is conspicuous in the case of services provided by banks and other financial institutions, healthcare institutions, such as hospitals and clinics, and restaurants. In short, the true rate of increase for service prices that accounts for changes in quality may be higher than indicated by the price statistics. This is a “stealth price hike” for services.

From this survey, we cannot determine the extent to which the price statistics underestimate the rate of increase for service prices, which make up around half of the consumer price index. However, the rates of real GDP growth and productivity growth calculated on the basis of the actual (quality-adjusted) rate of price increase would be lower than the statistical figures.

If productivity is to be strictly measured, it is necessary to account for labor inputs by consumers. There is an increasing number of cases where consumers have to respond to a decline in service quality by contributing more time to the effort themselves. Although digitalization has been promoted as a way to deal with labor shortages, there are many computer systems that are very inconvenient from the consumer perspective because they are intended to address problems faced exclusively by the service providers. One indication of that is the fact that relatively few young people have noticed a decline in service quality, while the feeling tends to be pervasive among middle-aged and elderly people. Promoting digitalization while addressing consumer convenience is important.

This matter is also related to macroeconomic policy. If the rate of increase in service prices is underestimated, it is desirable for the Bank of Japan to tighten monetary policy earlier and stronger compared to what would be required if the policy decision were to be based solely on the price statistics. If the actual (quality-adjusted) GDP growth rate is lower than the official figure announced as part of the GDP statistics, there will be a greater need for policy measures to increase supply capacity.

>> Original text in Japanese
* Translated by RIETI.

November 30, 2023 - Published in Nihon Keizai Shimbun's "Economist 360° Perspective"

January 23, 2024

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