When discussing economics and consumer behavior, terms like Inflation, Shrinkflation, and Skimpflation frequently arise. While their names might seem similar, each term has a specific meaning and distinct consequences.
No matter your financial background or level of knowledge, this blog offers something for anyone curious to understand inflation, Shrinkflation & Skimpflation; their causes & consequences to companies & consumers.
What Is Inflation? Inflation refers to when prices for goods increase over a given period. This concept has more to it; an inflationary price hike indicates that currency values have decreased and reduce purchasing power for people.
Most economies use CPI – consumer price index – as a proxy measure of inflation rate. How is it computed?
Example
Consider CPI levels from 2020 and 2021 were respectively 210 and 220; therefore the percentage of inflation is calculated as [(220-210)/210]*100=4.76%; any negative percentage represents deflation.
Causes of Inflation
There can be three reasons for inflation: short-term, medium-term, and long-term causes – though long-term is thought to be caused by money supply in the economy. Two key causes include:
1. Devaluation
Devaluation occurs when your currency’s exchange rate decreases and its value falls in comparison with US Dollars; for instance if Canadian dollars drop compared with American ones this causes inflation and makes less goods available to purchase at once – one major cause of inflation.
2. Rising Wages
As wages increase, people can buy more goods. Their disposable income rises and so do spending levels; creating a vicious circle as prices of goods continue to increase and income declines simultaneously.
Example of Inflation
Even in developed nations such as Canada and the US, inflation strikes with equal force as in other developing nations.
Canada currently experiences an annual inflation rate of approximately 4%, but housing costs increase at an approximate annual rate of 6.0% and 6.5% for rental payments respectively.
In the US, a survey conducted by the Department of Labor, Bureau and Statistics compared bread loaf prices from 2013 with those observed 25 years earlier; they noted a 140% price hike over this timeframe.
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What Is Shrinkflation? Naturally, its name implies something to do with shrinkage – this term refers to when a product’s quantity or price decline while remaining unchanged. Economically speaking, we use it when the size or quantity decreases while price remains constant.
Ofttimes this practice involves lowering quality or entering inferior territory during production of products. You might use inferior raw materials or decrease final size.
Pippa Malmgrem, a British economist, coined this term back in 2009. Since then, it has become an industry standard.
Causes of Shrinkflation
There may be multiple reasons for shrinkflation to occur. But generally there are two primary causes. Let’s examine them one at a time.
1. Increase in Production CostS The primary cause of Shrinkflation is rising production costs. With their margin of profit decreasing as production costs escalate, producers respond by either decreasing product quantities or switching to lower quality materials in order to maintain profit levels – often customers don’t even notice when production decreases, since reduction is too slight for customers to notice the change.
2. Increased Market Competition
We all understand that the Food and beverage industry is among the most fiercely-competitive sectors. Consumers find many alternatives on the market and so producers seek ways to manufacture products so as to keep consumers pleased while keeping profits constant – an act which could ultimately result in shrinkflation.
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