Value deflation encompasses tactics like shrinkflation, where retailers and service providers discreetly cut their costs by selling smaller packages, providing smaller portions, or generally offering less for the same price to maintain a consistent sticker price. This strategy is often employed by businesses facing rising costs to sneakily raise prices without alerting price-conscious consumers.
Economy-wide, value deflation manifests as a form of hidden inflation, disguising price increases that inflate the nominal price levels while delivering less real consumption. This can lead to an understated inflation rate and miscalculated cost of living if not accounted for in traditional price indexes.
Value deflation generally presents as ‘hidden inflation’, showing up in qualitative changes that evade standard inflation metrics. For instance, companies may start using less durable materials for products or include more preservatives to extend the shelf-life of items formerly sold as fresh produce.
Key Takeaways
- Businesses practice value deflation by reducing the value delivered to customers rather than raising prices.
- Shrinkflation is a form of value deflation, where package or portion sizes are cut down but prices remain the same, or through quality reduction, where a product is subtly cheapened yet sold at its former price.
- Value deflation complicates the picture of inflation, particularly for statistical agencies trying to measure it accurately.
Understanding Value Deflation
Value deflation is essentially a covert price hike, executed in a way that commodifies shrinking quantities and reduced quality, but at consistent price points. This strategy caters to consumer psychology as price changes typically draw more attention than quality adjustments.
However, value deflation can backfire, as evidenced by Kraft’s 2016 shrinkage of Toblerone bars, which caused public outcry in the United Kingdom. British food retailers widely adopted value deflation to cope with a weak pound and pricier imports, with more than 2,500 products affected between 2012 and 2017. For example, in 2021, Walkers removed two packets from a 24-pack of crisps but maintained the price at GBP 3.50.
Special Considerations
Value deflation often eludes standard inflation measures like the Consumer Price Index (CPI) or the Retail Price Index (RPI), making it challenging to detect. Often the tactics—such as substituting lower-cost ingredients or materials—remain under the radar. For example, a cocoa maker using a cheaper sweetener or a cheese producer increasing wood pulp content might subtly degrade product quality without significantly altering consumer behavior or falling under statistical scrutiny.
Consumers, along with economic statisticians, struggle to detect service cutbacks or material downgrades. Whether companies risk their reputation with these practices before increasing sticker prices or suffering from compressed operating margins remains to be seen. However, it’s evident that vigilant consumers must stay aware of these stealthy packaging tactics.
What Are the Reasons for Value Deflation?
The principal driver behind value deflation is rising production costs, which manufacturers prefer not to directly pass on as price hikes. Instead, they opt to reduce product size—a tactic evident in shrinkflation.
Understanding Deflation vs. Value Deflation
Traditional deflation indicates a significant price drop within an economy, the direct opposite of inflation. In contrast, value deflation is a reaction to inflating costs, leading producers to minimize the commodities or the service provided to consumers without changing price points.
Is Value Deflation Reflected in The CPI?
While the Consumer Price Index (CPI) aims to gauge inflation by tracking a basket of consumer goods, it overlooks reduced product quality, shortened shelf-life, shrinkflation, and similar methods of value deflation. As these forms of ‘hidden inflation’ can escape official records, consumers must remain vigilant.
Related Terms: inflation, consumer price index, retail price index, deflation, operating margins.
References
- Eater. “Are These New Toblerone Bars the Biggest Disaster of 2016”?
- U.K. Office for National Statistics. “The impact of Shrinkflation on CPIH, UK: January 2012 to June 2017”.
- The Guardian. “Smaller Packs, Same Price: Curse of ‘Shrinkflation’ Hits Shoppers’ Baskets”.
