The consequences of inflation

One of the important challenges facing households when they experience rising inflation is a decline in their real incomes when the price level in the economy rises at a faster rate than household wages. For example, the US inflation rate peaked at 8.4% in September 2022 and average earnings were growing at 5.3% which means real incomes at that time were falling by 3.1% (8.4% – 5.3%). High inflation has brought further problems for households in the form of shrinkflation and skimpflation. 

Shrinkflation is when businesses reduce the size of a product rather than increase its price.  For example, Kellogg’s reduced the size of its famous snack brand Pringles from 200g to 180g and then to 165g. Skimpflation is when producers change the ingredients in their products to reduce production costs. The food manufacturer Bertolli, for example, has reduced the olive oil content of its vegetable spread from 21% olive oil to 10%. There are countless examples of shrinkflation and skimpflation in food manufacturing but it can also be seen in the service sector. Some airlines, for example, reduce the distance between seats on their aircraft to increase the room for more passengers. You pay the same for your ticket but have less space on your flight. 

Businesses use shrinkflation and skimpflation when their costs are increasing because reducing the size of their product or changing a product's ingredients means they can keep the headline price of their product unchanged. Many managers believe that shrinkflation and skimpflation are effective strategies when costs are rising because are less likely to reduce their revenues and profits compared to an increase in the headline price of their products. 

Shrinkflation and skimpflation have always existed but the reemergence during a time of high inflation are an interesting example of economic events and their consequences.  The end of the COVID-19 pandemic and the conflict in Ukraine combined to trigger rising inflation and households across the world are now trying to deal with the cost of living problems that come with rising prices. Shrinkflation and skimpflation are further pressures hard-pressed people have to deal with because of high inflation.

Possible questions to discuss with a class

1. Research further examples of shrinkflation and skimpflation.

2. Why are shrinkflation and skimpflation a problem for households?

3. Why for firms choose shrinkflation and skimpflation rather than increasing their prices when they experience a rise in costs?