During the period after the inflation rate began to rapidly increase in the spring of 2021, a number of news articles noted cases of “hidden inflation.” This hidden inflation took two forms: (1) The quality of some services was declining, and (2) some packaged goods contained smaller quantities at the same price. The first type of inflation involved, for example, hotels no longer offering free hot breakfasts or cleaning rooms every day during a customer’s stay. The second type of hidden inflation involved, for example, the number of tissues in a small Kleenex box being reduced from 65 to 60, although the price was unchanged. This second type of hidden inflation is called shrinkflation. When compiling the CPI, the BLS takes shrinkflation into account but not most declines in the quality of services.

a. Why might it be easier for the BLS to correct for the effects of shrinkflation than for the effects of declining service quality, such as less frequent housekeeping services in hotels or less frequent bathroom cleaning in restaurants?

b. If the BLS could correct for the first type of hidden inflation, would inflation in the prices of some services have been higher or lower than in the data the BLS publishes?

Briefly explain.