The scourge of “stealthflation”

THERE IS, AS economists like to say, no such thing as a free lunch. Buy your lunch in a branch of McDonald’s, however, and you may find there is no such thing as free relish, either. Outlets in some countries now charge for ketchup and other condiments. Yet McDonald’s is not alone in hitting customers with unexpected charges. Amid a surge of inflation, firms have found several stealthy ways to raise prices. Could 2024 mark a turning-point in this invidious trend?

A classic example is the technique of “unbundling”, a ruse pioneered by low-cost airlines. Long ago they began charging extra fees for things that used to be included, such as in-flight food and checked luggage. Then came charges for seat selection, or for any cabin bag larger than a sock stuffed with spare underwear.

Lately things have got really out of hand. Some airlines now apply a “technology development charge” for the privilege of booking online which, oddly, depends on distance travelled—those web servers have to work much harder, you see, to deliver long-haul tickets. Others charge for printed boarding passes, airport check-ins, or in-flight blankets. It is only a matter of time before airlines start selling tickets for the shuttle bus to the plane, levying a fee per item of clothing worn, or charging to use the loo. (Ryanair’s boss, Michael O’Leary, once actually suggested that last one.)

The practice has spread. Hotels and resorts often charge a “check-in fee”, takeaway joints a “packing fee”, and ride-hailing apps a “safety fee”. Airbnb, a short-term rental platform, has been criticised for adding excessive service fees and cleaning fees.

But extra fees are not limited to services: they are also being applied to physical products. BMW introduced a monthly fee of $18 to activate seat warmers on some of its cars, with “unlimited” access for a one-off fee of $415. Mercedes-Benz charges $60 a month, or $600 a year, for the option to boost the acceleration of some of its electric vehicles. Imagine if this catches on. Want to use your smartphone camera’s zoom? Pay up. Need to use your oven at its maximum temperature? Sorry, that is for premium subscribers only.

A second way businesses are sneakily boosting revenue is “surge” pricing. Airlines and hotels have long varied their prices with seasonal demand. But the ability to track demand in real time means prices can be adjusted from minute to minute: Uber and other ride-sharing apps charge more when demand is high.

Surge pricing is now infecting other industries. In September a British pub chain announced that pints of beer would cost more in the evenings and on weekends, or during big sporting events. Prices of tickets for concerts, sporting events and theme parks are also constantly tweaked. In theory, this is a triumph of the invisible hand of the market: if you want to pay less, buy when demand is low. But disgruntled consumers complain that the line between charging what the market can bear and profiteering is a thin one.

Then there is the seemingly unstoppable epidemic of tipping. Foreigners visiting America have for years been caught out by the country’s pervasive tipping culture and its eye-watering expectations. At 20%, America’s average tip rate is the highest in the world. The justification is that service workers can legally be paid as little as $2.13 per hour, so it is up to customers to do the decent thing to ensure waiters, bartenders and the like can earn a living wage. Touchscreen-based checkouts mean customers are being asked to pay tips more often, and in unlikely places. They may find themselves being asked for tips at convenience stores, by self-service machines and even on websites.

Some hotels add gratuities for staff to the bill automatically, thus taking the tip as a hidden fee. But it is not just America. Asking for tips has spread to other countries, because of the ubiquity of apps and contactless payment systems. Australians grumble that food-delivery apps now add automatic tips. Indians are often baffled by prompts to tip taxi drivers.

Might the fever of stealth price-rises finally break in 2024? Perhaps. Falling inflation may temper the use of outlandish methods to maintain margins. Governments are making noises about regulation: in America, President Joe Biden wants to crack down on “junk” fees. And consumers are pushing back. Americans complain of “tipping fatigue”. BMW recently scrapped its seat-warmer fees in response to customer anger. Airbnb has revamped its platform to make extra fees more visible. There is, surely, an opportunity for firms prepared to offer simple, “no hidden extras” pricing.

Yet it seems more likely that having discovered myriad methods of padding prices, companies will keep doing so. Airlines are experimenting with unbundling perks from business-class tickets. BMW and Mercedes-Benz plan to go ahead with other fee-based “extras”. Demands for tips still abound. Indeed, one American airline now lets passengers tip their cabin crew. The cross-pollination of stealthflation techniques evidently has some way to go. Expect to experience more outrage in 2024.■

Leo Mirani, Asia correspondent, The Economist, Mumbai