Shrinkflation, a prevalent trend in modern businesses, has made headlines recently due to rising costs prompting many companies to adopt this approach. Essentially, shrinkflation is the process of reducing a product’s size while maintaining its original price, acting as a concealed form of inflation. It is a strategy majorly adopted by companies within the food and beverage industries, to subtly elevate profit margins or sustain them amidst escalating input costs. Business and academic research circles also know this term as package downsizing.
In a broader economic context, shrinkflation may denote a situation where an economy undergoes contraction, simultaneously witnessing inflation, or rising price levels. This macroeconomic view studies the behaviour of national or regional economies, focusing on economy-wide phenomena such as total goods and services production, unemployment rates, and general pricing behaviours.
The Trend of Shrinkflation in Modern Industries
Shrinkflation is increasingly becoming a standard practice among manufacturers. The annual rate of product downsizing consistently grows, with prominent producers in European and North American markets depending on this strategy to retain competitive product prices without considerably shrinking their profit margins. However, shrinkflation often leads to customer discontent and declining consumer sentiment towards the specific producer’s brand.
Exploring Major Causes of Shrinkflation
The main cause of shrinkflation can typically be traced back to heightened production costs. The escalation in the cost of ingredients, raw materials, energy commodities, and labour intensifies production expenses, thereby reducing profit margins for producers. A way to restore or improve the profit margin is to reduce the product’s weight, volume, or quantity, maintaining the retail price at the same level. Most consumers tend not to observe minor reductions in quantity, ensuring that sales volume is unaffected.
Another cause of shrinkflation can be attributed to intense market competition, particularly within the food and beverage industry. Given the abundance of available substitutes, consumers have extensive choices, leading to fierce competition among producers. Consequently, manufacturers seek options that allow them to retain customer loyalty and simultaneously maintain their profit margins.
Deducing Inflation Control from Previous UPSC Civil Services Examination Questions
An examination of past UPSC Civil Services Examination questions provides insight into inflation in India. A question asked in 2015 was, “With reference to inflation in India, which of the following statements is correct?” Among the provided options, the correct answer was, “Decreased money circulation helps in controlling the inflation.” This supports the understanding that both the Government of India and the Reserve Bank of India are responsible for controlling inflation. A decrease in money supply aids in inflation control as people have less money to spend, whereas an increased money supply contributes to the escalation of inflation rather than its control.
