Report: Inflation Likely Higher than Reported When Adjusted for Quality

According to the American Customer Satisfaction Index (ACSI) in Ann Arbor, overall customer satisfaction hit a low not seen since 2005 in the fourth quarter of 2021, slipping a half percent to 73.3 out of 100.
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The American Customer Satisfaction Index for the fourth quarter of 2021 show inflation is likely closer to 10 percent when adjusted for quality. // Stock Photo
The American Customer Satisfaction Index for the fourth quarter of 2021 shows inflation is likely closer to 10 percent when adjusted for quality. // Stock Photo

According to the American Customer Satisfaction Index (ACSI) in Ann Arbor, overall customer satisfaction hit a low not seen since 2005 in the fourth quarter of 2021, slipping a half percent to 73.3 out of 100.

“COVID-19 has obviously played a role in recent satisfaction slumps. However, since both the flattening and subsequent decline in customer satisfaction began before the pandemic appeared, there are several factors at play,” says Claes Fornell, founder of the ACSI.

“The most important is deteriorating quality, as judged by consumers. While widespread, it’s most pronounced in services. Due to the pandemic, the problem has been amplified by a lack of product availability, supply issues, and labor shortages.”

Historical data shows that through much of the 1990s, there was a sharp decline in customer satisfaction, but as businesses began to realize that customer loyalty was often contributing more to profits than increased market share, there was a shift toward a greater focus on customer satisfaction. Accordingly, ACSI increased sharply over many years.

As companies modified their attention and resources from customer satisfaction as a key performance indicator (KPI) to other key measures and devoted more effort to enhancing “the customer experience,” the rate of customer satisfaction improvement slowed, flattened, and subsequently turned negative.

ACSI has declined sharply since 2018, falling nearly 5 percent. Because ACSI is an indicator of the quality of economic output, this is problematic with respect to economic growth, corporate profitability, consumer utility, and inflation.

Despite this, households have had money to spend, leading to strong economic growth in 2021. Demand has been greater than supply, which caused a reversal of power in the buyer-seller relationship, with buyers competing for a company’s business instead of the other way around. As a result, buyers lose power relative to sellers. Customer satisfaction also matters less for business when demand is greater than supply. Quality suffers, and inflation increases.

ACSI tracks quality, as experienced by the consumer, as well as satisfaction. Quality has dropped 5.2 percent since 2018, including a decline of 3.3 percent since 2020. Changes in quality are important for determining inflation. The consumer price index (CPI) is adjusted for quality changes but only for a small fraction of the included products and services. ACSI measures quality for all 47 industries it tracks. According to the Bureau of Labor Statistics, inflation is up by 7.5 percent on an annualized basis, somewhat higher than the annualized GDP growth.

The ASCI states inflation is likely even higher than 7.5 percent if more fully adjusted for quality decline. Quality data suggest that actual annualized inflation is probably about 10 percent at this juncture. That would put its increase greater than that of both GDP and wage growth — not a sign of a healthy economy.

The national ACSI score (or ACSI composite) is updated each quarter based on annualized customer satisfaction scores for all sectors and industries. Scores are based on data from interviews with roughly 500,000 customers annually. For more information, click here.

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