When discussing economics and consumer behavior, terms like inflation, shrinkflation and skimpflation often come up. Though their names sound similar, each has their own meaning and distinct ramifications.
No matter your level of financial expertise, in this blog you will explore inflation, shrinkflation and skimpflation to better understand their causes as well as effects they may have on businesses and consumers alike.
What Is Inflation? When prices of goods increase over a period, we refer to it as inflation. But the term has more profound ramifications: this spike indicates a loss in currency value which decreases people’s purchasing power and purchasing ability.
Most economies rely on consumer price index (CPI) as a proxy to measure inflation rates. How is it computed?
Example
Say the Consumer Price Index for 2020 was 210 and 220 in 2021. In this instance, inflation would equal [(220-210)/210]*100 which would equal 4.766%; any negative percentage figures represent deflation.
Causes of Inflation
There can be several causes for inflation: short-term, medium-term and long-term. But money supply in an economy is said to be one main contributor. 2 primary factors contributing to inflation include:
1. Devaluation Devaluation occurs when your currency’s exchange rate declines, meaning its value drops in terms of US$ and you can purchase less goods, leading to inflation. This phenomenon can have devastating repercussions for our economies and economy as a whole.
2. Rising Wages
As wages increase, people can purchase more goods due to increased disposable income resulting in greater spending – this cycle continues as prices for goods and income also increase simultaneously.
Examples of Inflation Even in developed nations such as Canada and the US, inflation strikes just as hard.
Canada currently experience an annual inflation rate of approximately 4%. If you are considering purchasing a home, remember that prices increase by at least 6% each year; rent payments increase 6.5% every year.
Department of Labor, Bureau, and Statistics conducted a survey comparing bread loaf prices from 2013 and 1988 and discovered a 140% rise. Do Enjoy Reading Common Uses of Reverse Mortgages!
What Is Shrinkflation? Shrinkflation refers to any situation in which product sizes or quantities decrease while their prices remain the same, creating economic instability and cost increases for consumers. In economics, shrinkflation occurs when this phenomenon takes place.
This practice often leads to reduced quality or inferior products when manufacturing them, using lower quality raw materials or decreasing product sizes.
Pippa Malmgrem, a British economist, coined this term in 2009 and since then it has become widespread use across food and beverage companies.
Causes of Shrinkflation
There may be many factors at work when it comes to shrinkflation, but let’s focus on two primary ones here.
1. Rising Production Costs
One primary cause of shrinkflation is high production costs. As a result, profit margins begin to diminish and in order to maintain them, manufacturers either reduce quantity or switch to cheaper materials (customers may even fail to notice it!). An interesting observation was that customers didn’t even notice when prices decreased so slowly!
2. Increased Market Competition
We all understand that the Food and beverage industry is highly competitive, as consumers find alternatives in the marketplace to keep customers interested and profits steady – an event which may lead to shrinkflation as consumers may switch products resulting in decreased profits for producers. This cycle could continue, leading to shrinkflation.
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