Beyond Inflation Numbers: Shrinkflation and Skimpflation

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Beyond Inflation Numbers: Shrinkflation and Skimpflation

December 01, 2022

By

Jeannette Bennett

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Education is not the learning of facts but the training of the mind to think.

—Albert Einstein

Have you seen this month's inflation numbers? Each time new numbers are released, the words inflation and inflation rate receive attention and trend in the news. Inflation is a general, sustained upward movement of prices for goods and services in an economy. It affects purchasing power, or the amount of goods and services that a unit of currency can buy; more specifically, inflation reduces purchasing power.

The most well-known measure of inflation is the consumer price index (often listed as "CPI"). This is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. These data are collected by a federal agency, the Bureau of Labor Statistics (BLS) , and released every month.

Inflation numbers are important when assessing the health of the economy and, in one way or another, affect everyone; they affect consumer and business decisionmaking. But it can also be helpful to think beyond inflation numbers, as business practices such as shrinkflation and skimpflation are looming—and worthy of considering.

Inflation’s Effects on Consumers

You may not know the recent inflation numbers, but you've likely experienced their results. You don't have to be an economist to understand that spending more to buy the same cart of groceries means inflation is a concern. You don't have to read the BLS's monthly report to understand that inflation erodes the purchasing power of money. You experience inflation each time you spend more money to buy the same cart of groceries.

Inflation affects consumers' budgets and spending decisions. If consumers' personal incomes do not increase, or they increase at a slower rate than the inflation rate, then consumers aren't able to buy the same amount of goods and services they could previously. When consumers are faced with spending more to get the same amount of goods and services, they may purchase fewer items or substitute less-expensive goods and services.

Inflation’s Effects on Businesses

Inflation also affects businesses. Businesses understand the reality of inflation when the costs of production increase and they must adjust to continue to earn a profit . Often businesses pass the higher costs of production on to consumers through higher prices. When this leads to inflation, it is referred to as cost-push inflation . For example, if the cost of transporting lettuce from California to Maine increases because fuel prices have increased, and the seller believes they can pass the extra cost along to the buyer, then the price consumers pay for lettuce at the grocery store will increase.

Business Reactions to Inflation

Businesses can raise prices to remain profitable when production costs increase. But they know that consumers are very conscious of price changes and may choose to buy a cheaper brand or stop buying the item completely. Businesses do not want to lose sales. For example, after increasing prices, one coffee shop owner lost nearly half their regular customers and posted the following on social media:

Some have traded down and are buying coffee for $1 at the McDonald's. If [customers] can get it for a dollar for not that notable of a difference, they're going next door. One customer who had been coming in for years said he was going to start making coffee at home, so he won't be coming in here every day.1

Shrinkflation

How can businesses cope with inflation and their desire to keep their customers? Businesses know that for some goods and services, consumers are more sensitive to changes in price2 than to changes in quantity, and this tendency often allows businesses to benefit from shrinkflation.

Originally known as downsizing, the term shrinkflation comes from the combination of the two words shrink and inflation. Shrinkflation is when businesses reduce the size or quantity of their products while charging the same or an even higher price.3 For example:

A package of bacon may look the same and sell for the same price, but instead of being 16 ounces it is only 12 ounces.

Similarly, a box of cereal that used to contain 18 ounces may look the same but contain only 16 ounces of cereal.

Or, a box of tissues may have fewer tissues than before when sold at the same price.

The BLS treats shrinkflation as a price increase when calculating inflation numbers. It makes adjustments for changes in the size or quantity of a packaged item to ensure consumers can accurately compare prices despite the changes in size or quantity.4

Although inflation numbers take shrinkflation into account, consumers have the responsibility to notice the changes in the size or quantity of a packaged item. Consumers...