How can a company raise prices without…raising its prices? Let us count the ways
Lesson summary
Hi there everyone, it’s Jeff and this is Plain English, where we help you upgrade your English with current events and trending topics. JR is the producer and he has uploaded the full lesson to PlainEnglish.com/455.
Prices are front and center once again, and on today’s lesson, we’ll talk about the ways companies can pass along increases in cost without raising the prices of their products. As we all pay closer attention to the prices of the things we buy, we should keep these hidden price increases in mind.
In the second half of today’s audio lesson, we’ll review the English expression apples-to-apples. In the video lesson at PlainEnglish.com/455, we’re going to talk about ways to compare your well-being across time periods. This is a really, really good one—it’s too hard to do in the audio lesson, which is why we make it a video. We also have a song of the week. Let’s get going.
The hidden bit of inflation
“Inflation” refers to the increase in prices in an economy. Economists think of prices like a big, economy-wide “basket of goods.” In most economies, the government measures the prices of that basket of goods periodically and reports on how much the prices change from period to period.
By itself, inflation isn’t necessarily bad. If all prices go up together, the net effect is zero. For example, if your income goes up by five percent and all your expenses go up by five percent, then you’ll be no worse off than you were before.
Inflation stings when costs go up faster than wages. If your wages go up by five percent, but your costs go up by seven percent, then your standard of living falls. Inflation also hurts people who are on fixed incomes, like pensions. Both paychecks and pension payments do sometimes rise, but they’re often sticky. What I mean by that is, they rise, but they rise more slowly than the prices at the grocery store. A grocery store or gas station can change its prices every day, but I’m guessing you only get a pay raise once or twice a year, if that.
That’s what’s going on in much of the world right now. In the U.S., inflation recently hit an annualized rate of 7.9 percent, the highest rate of inflation in over 40 years. That means a basket of goods that cost $100 a year ago would cost $107.90 today.
It’s a similar story around the world. In Brazil, prices were up 10.5 percent; in Mexico, it was over 7 percent, the highest in two decades; in Europe, it was 5.8 percent. But even these numbers don’t capture the whole story. When the government measures inflation, it compares prices of equivalent goods in two periods. But it’s hard to make a true apples-to-apples comparison because companies try not to raise prices. Instead, they try other ways to make goods more expensive.
So here’s a list of ways companies can pass along the effects of inflation, without raising prices. See how many you’ve noticed in your life.
Number one—and this should not be a surprise—is package size. This is especially true at the grocery store. I’ll give you a personal example. I often make a salad for lunch. The base of the salad is spinach. A container of spinach usually lasts me three lunch salads, three big handfuls of spinach. But lately, I started to notice my third salad was a little skimpy. The container of spinach looks the same as it always has. But I looked a little closer, and guess what? It’s a different shape. Each container has less spinach than before.
Companies know that consumers pay attention to the overall price, rather than the price per unit. That makes sense. We can’t all be doing math and examining labels closely on every trip. So companies prefer shrinking the package to raising the price.
Number two, a reduction in service. This is common in the hospitality industry. Let’s say a hotel room cost $200 per night last year, but $220 per night this year. That’s a ten percent increase in cost. But the hotels might be giving you less value for your money.
Here’s what I mean. Many hotel chains have eliminated housekeeping service for multi-night stays. And it’s not just housekeeping. Disney eliminated free shuttles at its resorts. Other hotels used to offer a hot buffet breakfast and now just offer a piece of fruit in a bag. So yes, the room on average might cost just 10 percent more. But the value you’re getting has declined. That’s the hidden bite of inflation.
Next up, bundles. Car dealers are famous for offering you useless extra services when you buy a car. Astute car buyers say no to all of that. But now, many of those extra services aren’t optional. Car dealers make you buy things like protective paint coating, mud flaps, and cargo protectors.
Now here’s one more way you can lose out during inflationary periods: extra fees. Peloton makes high-end exercise bikes. Last year, you could order a Peloton and the delivery team would assemble it for you. Now, if you want assembly, you need to pay $250. The headline cost might not have changed, but if you add the extra fee, the total cost has changed. That extra fee isn’t always picked up in inflation statistics.
How many times have you placed an online order and had to pay required “convenience” fees? Companies find that it’s easier to add small-percentage fees than to raise prices. They often disguise it with official- or innocent-sounding names. This is common with delivery apps, tickets, and restaurants. Hotels have added “sustainability” fees. Airlines have added “COVID sanitization” fees. Some restaurants are even adding a separate “COVID” fee to all checks, for both delivery and in-person dining. One exasperated customer asked, What’s next, a dishwashing fee?
Harley Davidson has 119-year history of bold innovation, but their latest innovation came from the accounting department. Harley hasn’t raised the price of its motorcycles, but it adds a “materials fee” to the bikes it sells. These can range from $850 to $1,500 per bike, and they’re not optional. I used to think “materials” were included in the price of a physical good; I guess not.
Settle in for inflation
It looks like we’re going to have to live with inflation for a while. Russia is the world’s number one exporter of gas, number two exporter of oil, and number three exporter of coal. Russia and Ukraine are number one and two exporters of wheat. Russia and Belarus are big exporters of the materials that make fertilizer. Fertilizer makes crops productive around the world. So this is going to hit food prices.
Think of all those fields that won’t get planted this year due to the war; that translates into crops that won’t get harvested in the fall. Supply will go down; prices will go up. When food prices go up, it hurts everyone. But it hurts the poorest people the most because they spend a greater share of their incomes on food. A lot of people just barely make enough to feed themselves and their families; many people, especially in Africa, will really feel the pinch. So now we can add world hunger to the list of this war’s tragic consequences.
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