What is the true effect of Shrinkflation?

As we know, inflation has managed to reach an all-time high during the cost of living crisis. However, there seems to be another more subtle form of inflation taking the UK by storm: shrinkflation.

What is shrinkflation?

In economics, shrinkflation, is the process of items shrinking in size or quantity, or even sometimes reformulating or reducing quality, while their prices remain the same or increase. (The Conversation, 2021). This tactic is often used by companies to maintain profit margins while avoiding the appearance of raising prices. Shrinkflation can be seen in a wide range of consumer products, from food items to household goods, and can be a subtle way for companies to increase profits without drawing too much attention to the changes they are making. But how does shrinkflation affect us as consumers?

Shrinkflation vs. Real Incomes

Shrinkflation can have a serious impact on real incomes for consumers. As the price of goods remains the same but the quantity is reduced, consumers will have to spend more money to purchase the same amount of product they used to. This can reduce the purchasing power of consumers and ultimately result in a decline in their real income. Furthermore, since shrinkflation is widespread across multiple products, it can contribute to inflation, which is a general increase in the price level of goods and services in an economy over time. Inflation can erode the purchasing power of consumers and reduce their real income. Since consumers have to spend more money to purchase the same amount of goods and services they used to, they will have less money available for other expenses, which can affect their standard of living.

In summary, shrinkflation can have a negative impact on real income by reducing the purchasing power of consumers and contributing to inflation. While it may benefit some consumers in certain circumstances, it is important to consider the overall impact on consumer welfare and the potential trade-offs between price and quantity.

Benefits of Shrinkflation

Some may argue that shrinkflation may allow some hidden benefits for consumers in some certain situations. First, it can lead to lower prices for consumers. As a company reduces the size or quantity of a product, they may be able to save on production costs, which can allow them to lower the price of the product. This can benefit consumers who are price-sensitive and looking for ways to save money. Furthermore, shrinkflation can lead to improved quality in some cases. Since a company reduces the size or quantity of a product, they may be able to focus on using higher quality ingredients or materials, which can improve the overall quality of the product. This can benefit consumers who are willing to pay a premium for higher quality products. Although, these benefits cannot outweigh the potential negative effects of shrinkflation, such as reduced value for money and confusion among consumers.

Shrinkflation vs. Policymakers

Shrinkflation may also have a significant impact on policy makers as might be hiding actual inflation within the economy. Inflation is a general increase in the price level of goods and services in an economy over time. Policymakers monitor inflation closely as it can have significant impacts on the economy, such as reducing the purchasing power of consumers and increasing the cost of borrowing for businesses and individuals. When the price of a product remains the same but the quantity is reduced, it can create the appearance of price stability or even deflation, as the price level appears to be unchanged or even lower. This can lead to a false sense of security for policymakers, who may not be aware of the reduction in quantity or size. If shrinkflation is widespread across multiple products, it can contribute to a general underestimation of inflation in the economy. Furthermore, shrinkflation can make it more difficult for policymakers to make informed decisions regarding monetary policy. If policymakers believe that inflation is lower than it actually is, they may not take necessary measures to combat it, such as raising interest rates or reducing the money supply.

Moving forward

While we can’t fight shrinkflation, it may be helpful to become more aware of it. We can be aware of shrinkflation by paying close attention to the size and quantity of products they purchase and comparing them over time. In addition, look for changes in product packaging, labeling, or weight, and compare them to the prices to see if they are getting less product for the same amount of money