In October last year, you asked us to write about stagflation and we did! It’s an environment where high inflation and low economic growth can wreak havoc on society and while there are murmurs that stagflation may be just around the corner, there are other more immediate inflationary risks that should probably concern us. So in today’s Finshots, we talk about this and more.


The Story

Let’s begin this story in the 1960s. At a time when inflation was the talk of the town.

The humorist Art Buchwald, writing for Washington Post sounded an ominous alarm. In a column titled “Packaged Inflation”, he revealed how price increases were being concealed. He took a dig at the American industry for “devising new methods to make the product smaller while making the package larger”.

Smaller product. Larger package. Same price. He was talking about an idea that is now popularly known as “shrinkflation”.

It’s as relevant today as it was in the 1960s. Why?

Well, fuel prices in India have been skyrocketing. This adds to the costs of transportation. Then you have commodity inflation — Prices of things like palm oil going on a march as well. And all this affects FMCG companies that manufacture things like soaps, snacks, and ice creams — items that you use daily. If these companies don’t hike prices, it’ll hurt their profit margins. So at some level, companies have to pass on the cost to consumers. But they can’t do it in an obvious manner, at least not always.

While you are seeing price increases across a few verticals, some reports contend that companies like HUL and Nestle have resorted to cutting product sizes in a bid to stay competitive. Now that’s “shrinkflation”. And this holds especially true in certain price-sensitive segments.

But hold on, is this really happening?

Let’s hear it straight from an FMCG company then. Here’s something that Subhashish Basu, chief operating officer of Prataap Snacks said,

"For companies that sell snacks at ₹5, ₹10 and ₹20 price points, absorbing the costs is the only route available. What we are trying to do is whichever category has a very sensitive price point, we are trying to lower grammage or trying to rationalize channel margins and then absorb as much as possible."

While he talks about the company absorbing the cost, read what he says again. He also mentions trying to lower grammage. Smaller product. Same price. Or “shrinkflation”.

Here’s another example of how shrinkflation affects the confectionery industry.

And there you have it, while we’re busy looking at prices increasing, we’re probably missing how the products we consume are shrinking in size.

What about the services industry?

Well, they have something too.

Imagine you own a restaurant. Costs are rising across the board but patrons aren’t visiting your place like they used to, especially after Covid. Sure, you can pass on some of the costs to consumers, but you can’t do it everywhere. What if staff wages are on the rise? What if the laundromat is charging a premium for washing your table linen? It’s hard to pass on these costs to consumers. So you do the only thing you can do.

You choose to run the restaurant with only 5 waiters instead of 6 or you let go of the extra cook. In any case, this cost-cutting program manifests in poor customer experience. People may have to wait longer for their dishes or maybe they’ll have trouble ordering the dish in the first place. So in effect, instead of raising prices, you offer customers a sub-par experience by skimping on quality.

It could be a hotel cutting down the frequency of cleaning service or a restaurant reducing the items served during a breakfast buffet. It could be an airline dropping hot meals in-flight or a car dealership making you wait for extended periods. When service companies are forced to offer a relatively poor experience at the same price, you’re experiencing what many people call “shadow inflation.”

And unlike shrinkflation, where economists can account for its impact in inflation statistics, it’s almost impossible to account for shadow inflation in the official figures. How are you going to adjudge quality of service? It isn’t that easy. So while these hidden forms of inflation may not pinch our wallets directly, they’re still something we should all be concerned about.

Until then…

Don't forget to share this article on WhatsApp, LinkedIn and Twitter

PS: When this writer visited a 5-star hotel recently, there was no valet to park the car. We had to self-park two levels below in the basement and then walk back up the car ramp to get to the lobby. That’s a diminished experience indeed.

Where else are you seeing signs of “shrinkflation” and “shadow inflation”? Write to us and let us know.