SHRINKFLATION (Syllabus: GS Paper 3 – Economy)
Context: As input prices, which were benign for a few quarters, turn inflationary, the spectre of shrinking packs looms large within the fast-moving consumer goods (FMCG) segment.
Shrinkflation
- About: It occurs when goods decrease in size while maintaining the same price, effectively reducing the value consumers receive.
- Hidden Inflation: It's a form of concealed inflation where producers opt to shrink product sizes rather than directly increasing prices.
- Price Dynamics: Although the absolute price remains constant, the price per unit of weight or volume rises due to the reduced size of the product.
- Reasons Behind Shrinkflation: Rising production costs and market competition are the primary drivers of shrinkflation.
- Higher Production Costs: Increased costs of ingredients, raw materials, energy, and labor prompt manufacturers to downsize products to maintain profit margins.
- Causes of Shrinkflation:
oIncreased Costs: Higher expenses in production lead to companies reducing product sizes to maintain profitability.
oIntense Market Competition: Pressure to keep prices competitive drives companies to shrink product sizes rather than increase prices.
oChanging Customer Demands: Evolving preferences may prompt companies to alter product formulations, resulting in size adjustments to meet demand.
- Impacts of Shrinkflation:
o Shrinkflation risks alienating customers who perceive they're receiving less for the same price.
o It complicates measuring price changes and inflation accurately, as product sizes may vary without reflecting in the price point.
