Inflation, Shrinkflation and Skimpflation – Meaning, Causes, Effects with Examples

When we discuss the economy and consumer behavior the terms Inflation, Shrinkflation and Skimpflation always appear. Just by names, they sound similar but each of these has a distinct meaning and different implications.

It doesn’t matter if you are an interested reader or a complex navigator of finances and the economy. In this blog, you will explore inflation, Shrinkflation & Skimpflation and understand what causes them and what effect they have on companies and consumers.

What is Inflation? 

When prices of goods increase over a period of time, we term it as inflation. This concept entails a deeper meaning. This increase in price shows that the home currency value has gone down. It implies that the purchasing power of people is getting less.

Most economies use the CPI as a measure to find out the inflation rate. CPI stands for consumer price index. How is it computed?

Example

Suppose the CPI for the year 2020 was 210 and for the year 2021 was 220. So, the percentage of inflation will be [(220-210)/210]*100=4.76%. If the percent comes as negative we call it deflation.

Causes of Inflation

There can be 3 reasons for inflation – short-term, medium-term as well as long-term. But the last one is said to be caused because of money supply in the economy. 2 main factors causing inflation are:

1. Devaluation

When the value of your currency decreases due to a lower exchange rate we call it devaluation. Suppose your currency is CAD $, if its value decreases in terms of US $ then you can buy less basket of goods. This is the biggest reason for inflation.

2. Rising Wages 

When people are paid more i.e. higher wages they can buy more goods. The disposable income will be more which leads to higher spending. It is a vicious circle as prices of goods are also and income also.

Examples of Inflation

In developed countries like Canada and the US, inflation strikes equally hard as in other developing countries. 

1. The annual inflation rate in Canada is around 4%. In fact, if you are trying to buy a house then keep in mind that its prices increase 6%. So, in the case of rental payments, they rise 6.5% annually.
2. In the US, a survey conducted by the Department of Labor, Bureau, and Statistics compared the rate of bread loaf in 2013 with the survey done in 1988. And guess what? They observed a 140% increase in the price in the 25 years.

What is Shrinkflation? 

Shrinkflation includes the word shrink so, obviously, it has something to do with shrinking right? In economics, we use it when the size of the product or the quantity of the product reduces but its price remains the same.

Often this practice is associated with lowering the quality or going into the inferior zone while manufacturing the products. You either use low-quality of raw materials or reduce the final size of the product.

You will be surprised to know that a British economist named Pippa Malmgrem coined this term in 2009. Since then, it is widely used in the food and beverage industry.

Causes of Shrinkflation

There can be many reasons why it happens. But majorly there are two main causes. Let’s see them one by one.

1. Increase in Production Cost

The primary cause of Shrinkflation is high production costs. Due to this, the profit margin of the producer starts to diminish. To sustain the same level of profits the manufacturer will either reduce the quantity of the product or start using low-quality materials. An interesting observation was that customers don’t even notice the reduction as it’s too small. 

2. Increasing Market Competition

You all know that the Food and beverage industry is the most competitive one. Consumers find plenty of substitutes in the market. Thus, the producers look for ways to manufacture the products in a way that consumers still favor them and profits remain constant. All this can lead to Shrinkflation too.

Examples of Shrinkflation

Now and then brands engage in this practice. Surprisingly, some of the top companies have used it too. Here are some examples:

1. Coca-Cola

They reduced the size of their 2-liter bottle to 1.75 liters in 2014. Guess, what? The price was the same.

2. Toblerone

Similarly, Toblerone reduced the size of everyone’s favorite to 170 grams from 200 grams.

3. Tetley

Tetley Tea did the same thing as well. They took out 12 tea bags from the box of 100, thereby reducing it to just 88.

What is Skimpflation? 

You just read about Shrinkflation above. Did you know that Skimpflation is even nastier than it? There only the portion was reduced. But here the overall quality is compromised. So, more simply we can say that Skimpflation is when for the same price you get fewer goods.

Now you must be wondering what is the difference between these 3 terms. Let’s simplify: In inflation the prices increase, in Shrinkflation the quantity is reduced and in Skimpflation the quality is reduced. Reducing quality also means giving less to consumers at the same price. 

Causes of Skimpflation

There are major 2 causes of Skimpflation:

1. Rise in Prices and Cost

If the production cost increases, the selling prices will increase and thus the consumer will pay more. The competition is very high in the market and companies want to grab more and more customers. To prevent losing any consumers, companies start selling lesser-quality products.

2. Less Labor

A deeper aspect of cost increase is a shortage of labor. If labor resigns the company tries to fill the vacancy. But in this economy, the wages are pretty high, and thus to cope with this increment in wages the quality suffers somehow.

Examples of Skimpflation

Usually, the consumers don’t even notice the practice of Skimpflation. After reading the examples given below you also might be shocked that you never noticed these things.

1. Airlines often limit the number of flight attendants. This way they save the salary expenses and customers pay the price of getting fewer services.
2. When you call a customer support service, your phone rings and rings and you keep on waiting. The inside picture is that companies hire less tech-supporting people. 

Effects of Inflation, Shrinkflation and Skimpflation on Economy 

The basic question that arises is the impact these phenomena have on the economy. There is no denying that all three create issues for consumers but what about the economy as a whole? There are some undeniable factors like the pandemic that created a huge wedge nationwide.

Inflation happens worldwide, shrinkflation and skimpflation on the other hand are not easily detected. The latter two are just tactics that companies use to cope with inflation and market competition. But in the long haul, they hurt the main agenda of companies i.e. customer retention.

Can we outrun such issues? No, the hostile economic conditions will continue because there is unjust income distribution, a shortage of labor, insufficient resources, and limited cash flows.

You may also like to learn about the Importance of Financial Literacy in Canada

Inflation, Shrinkflation and Skimpflation: Final Thoughts 

Inflation, Shrinkflation & Skimpflation leave customers unhappy and wishing that they earned more. Every country tries to limit the level of inflation to keep the economy efficient and well-functioning.

There are certain advantages to each of these three phenomena. But we cannot ignore the disadvantages as well. Be it airlines, food & beverage, or the service sector, the impact has spread to every industry.

What do you feel is the biggest threat imposed by these economic practices? Feel free to share your opinion.