Inflation and Shrinkflation: How Firms Use Hidden Price Adjustments to Navigate Economic Turbulence
“They just don’t make them like they used to” is a common phrase uttered by consumers when complaining about the perceived low quality of recently-made goods. This is sometimes seen as paradoxical, as it is often assumed that quality of all goods improves over time due to improvements in technology and worker productivity. Consumers have recently been pointing out the alleged decline of new goods, and researchers agree with them, pointing out that there are several factors that reduce the quality of modern goods compared to their predecessors.
Part of the “they just don’t make them like they used to” trend is the newer phenomenon known as shrinkflation. It combines the words “shrink” and “inflation” because the two combine to effectively equal out. The product “shrinks” during a period of “inflation” so the price remains the same. Consumers may feel that they are getting a deal (consumer surplus) because they are able to purchase good X for the same price as last year while the prices on goods Y and Z have increased.
Types of Shrinkflation
Quantity
The first type of shrinkflation is in terms of quantity, with quality being held constant. This is most often seen with groceries, where sellers can adjust the per-unit size that they sell. For example, a drink company may slightly reduce the size of its bottle, from perhaps 1 liter to 750 milliliters, and continue selling each bottle at the same price. Many consumers may be unaware of the shrinkage of the bottle, and only become aware if they are able to find an older bottle to compare the new one to.
While some consumer-cited examples were more subjective, plenty of objective examples have been detected. Bags of potato chips have notoriously “shrunk” in terms of the product weight, sometimes while the bags themselves remained the same size. Drink bottles have also frequently been shrunk, such as from 32 ounces (1 quart) to 28 ounces. As with chip bags, sometimes producers try to keep at least one dimension of the container the same size so that the full-size and shrunk versions feel similar. A third example is the number of units in a size, such as ten chicken wings per small platter, being reduced.
Consumers protest quantity shrinkflation because they are typically not informed of such shrinkage ahead of time and thus feel misled.
Quality (Skimpflation)
Sometimes, the quantity stays the same but the quality of parts is reduced. This is sometimes given the separate name skimpflation, as the producers are “skimping” on quality materials or assembly. Frequently, this affects services included in a larger purchase, such as amenities at a restaurant or amusement park. Many cite skimpflation occurring after the Covid pandemic shutdowns, when lots of companies did not bring back all of their traditional amenities when re-opening…despite their prices remaining the same.
Much of this skimping on services was related to labor, with companies allegedly keeping only minimal staff despite the end of the pandemic. Many employees were furloughed during the pandemic, but companies only brought back some of them when given the all clear. Other examples of reduced staff have been occurring since well before the Covid pandemic, often in terms of customer service. [In]famously, few companies keep staffed call centers to help customers; much of this is now automated. Consumers frequently cite frustration in trying to get help from an actual person when dealing with a product or purchase issue.
Critics says that sometimes skimping on labor is masked as technological innovation, such as retail stores and supermarkets installing self-checkout machines instead of hiring cashiers or restaurants using self-order and self-pay kiosks or tabletop touchscreens instead of hiring wait staff. New technology is indeed in use, but it is directly utilized to reduce labor costs and transfer that labor onto customers. Eventually, the novelty of using the new technology wears off and consumers chafe at being asked to scan their own items.
Dangers of Shrinkflation: Masking Poor Economic Performance
Shrinkflation is not, pardon the pun, a small deal. It can actually mask economic weakness by “hiding” the warning light of inflation. Without shrinking or skimping, product prices would rise due to stagflation, or rising prices caused by higher costs of production. This cost-push inflation, unlike “traditional” demand-pull inflation, is considered more harmful because consumers are not making more income to handle the rising prices. With demand-pull inflation, costs are rising because most consumers are earning more money and spending it; their real income (income adjusted for inflation) and quality of life remain stable.
Firms engaging in shrinkflation and skimpflation can be masking important information about their rising costs of production, tricking investors. On the surface, revenue and costs look stable, but it is actually because few inputs are going into each unit of output. Investors may continue pouring money into an underperforming firm, with the situation only stable as long as customers are fooled. When customers discover the shrinkflation or skimpflation, they may abandon the product en masse, causing sudden decrease in revenue.
Benefits of Shrinkflation: Easier on Firms
Shrinkflation and skimpflation may be financially beneficial to firms due to menu costs, or the costs of changing one’s signage and marketing to reflect changes in product price. It is easier for firms to simply shrink their products and maintain the price than try to advertise benefits of a more expensive product. The concept of sticky prices explains that sellers do not like to regularly adjust their prices, for this can entail operational costs and may upset consumers, which could result in a decrease in revenue if prices rise and demand is significantly elastic. For nationwide companies, simply engaging in shrinflation could be a significant cost savings.
Not Shrinkflation: Prices Decreasing Because of Reduced Costs of Production
Some products have genuinely decreased in price with quantity held constant or even improving. This has most commonly been seen with electronic goods like televisions, computers, and some appliances. These prices have fallen steadily since the 1950s, often with quantity improving simultaneously. Much of this is due to technological improvements and economies of scale. As producers became able to mass produce these complex products, their market price fell due to increasing supply.
Controversially, however, consumers may not always be getting a better deal with newer electronics: planned obsolescence is allegedly also occurring in this market as well. While planned obsolescence began in the 1950s with automobiles and heavy-duty appliances, many consumers believe it has extended to personal electronic devices. A common complaint is that modern laptop computers and smartphones quickly degrade and are expensive to repair, practically forcing the consumer to purchase a new device. They compare these newer goods unfavorably to desktop computers of the 1990s and early 2000s, many of which are still running.
Complex Issue: Is Decreased Longevity or Survivability Due to Factors Other Than Lower Quality?
To be fair to producers, decreased longevity of some modern products versus their older predecessors may be due to miniaturization and transportability rather than quality. Desktop computers last longer than laptop computers, but this is more due to their structure and ability to cool better than laptops. Also, desktop computers avoid the routine abuse of being carried around, slammed onto surfaces, and shoved into bags and backpacks. Therefore, today’s laptops are not necessarily of lower quality than older desktops, but are simply a different product.
Therefore, if the price of today’s laptop is the same as that of yesteryear’s desktop, and the laptop is not lasting as long, it is not actually a case of shrinkflation. The two goods are actually not the same, and are not intended to be. Many consumers may conflate them, however, and see them as the same product. Unfortunately, some producers may take advantage of this and try to pass off shrinkflation or skimpflation by claiming their reduced-size product is “new and improved.” This can make it difficult for customers to determine the situation without more in-depth research.