Temporary Inflation Fees and Greedflation

A couple weekends ago at the Original Pancake House, I encountered yet another strange form of inflation: the “Temporary Inflation Fee.” When you ask for a table, the concierge stand displays a list of seven rules. If you read to the end, you discover Rule #7, which proclaims the adoption of an unquantified Temporary Inflation Fee. When the check arrives, they start with the menu prices, then tack on another 3.6%.

Someone else’s bill.

Personally, I was more annoyed by the shrinkflation of the meal: The chocolate chips and whipped cream were considerably stingier than I remembered. Yet economically, it was the Temporary Inflation Fee that got my attention. Economists have lots of models with “menu costs,” and one obvious objection is “How high can menu costs be? You don’t actually have to print a new menu. If unexpected inflation hits, just announce a surcharge.” The TIF is the obvious objection come to life.

A typical reply to the obvious objection is just that consumers consider surcharges “unfair.” Since I’ve never seen a TIF anywhere else, the simplest story is that the Original Pancake House is making a rare mistake. (Though they’re not entirely alone). Whatever extra money they earn from the TIF is worth less than the good will they’re losing by norm-breaking. Indeed, the customer who Yelped the receipt above opines:

They have raised the prices and [are] about to raise them again. They have also put [a] Temporary Inflation fee on all checks. I don't know if the amount is a percentage or a flat fee. The sign is on the small plaque before you go to your table. They are not telling you about. They want you to find it... nope. This is robbery.

Another story, however, is that after two years of high inflation, norms have broken down. Early in Covid, consumers would have been outraged by “price-gouging.” For a long time, businesses kept prices low even in the face of glaring shortages. After Biden’s second stimulus, though, the gap between the market price and the market-clearing price got so large that businesses started to bite the bullet: raise prices and alienate customers. As price hikes grew commonplace, they started to blend together. While consumers were annoyed in general, they lost the will to stay annoyed at any business in particular. Indeed, it quickly became hard to remember who had raised which prices by how much.

A few economists aside, of course, almost no one acknowledges that inflation solved the problem of random shortages we’d endured since March of 2020. Remember: While pumping up Aggregate Demand during a boom is a bad idea, keeping prices steady in the face of runaway Aggregate Demand is an even worse idea.

Will Temporary Inflation Fees spread? I suspect not. After a sharp disinflation (not to be confused with deflation!), most firms are no longer looking for a palatable way to raise prices. Equilibrium has returned. As price increases - nominal and real, forthright and sneaky - grow correspondingly rare, consumers become touchier about any remaining price hikes. Especially when you tack on a Temporary Inflation Fee that isn’t even on the menu.

Does this sound like a populist “greedflation” story? Superficially, perhaps. My Big Picture, though, is that fairness norms mess up market performance until firms figure out a way to defuse them. Temporary Inflation Fees are a heavy-handed variant on what firms have been doing for the last two years. And compared to the alternative of perpetual shortages, we should be grateful.