Sometimes we notice that the products we buy are smaller than they used to be. This is due to a phenomenon called shrinkflation, which affects inflation data. This event is becoming more and more common in the world and especially in America.
There are many times when we go to the market and find that the bags of chips or bread are a little smaller than they used to be. The same thing often happens with detergent packets. More and more, companies are reducing the size of their products without reducing the price, which is causing outrage among consumers.
This is not something new, but it is something that has increased recently. The strategy is clear: discreetly reduce the size of the product without increasing the price. Relatively recently, the President of the United States, Joe Biden, spoke with disgust on this issue. The U.S. government is constantly adjusting official inflation data to account for shrinking product sizes.
The reduction in size became very frequent starting in 2016, a time when general inflation was low. Later, this phenomenon became slightly less frequent when the pandemic began in 2020, and has now returned to pre-pandemic levels, according to the United States Bureau of Labor Statistics. Several economists have pointed out that the set of products being measured has changed over the years, making comparisons over time more of an approximation than an exact science. What we do see is that the magnitude is now more pronounced for some products. The products where this phenomenon is most evident are candy, detergents and toilet paper.
When products contract, they increase inflation.
There is another phenomenon that is more difficult to measure than shrinkflation. It is called skimpflation, and it occurs when companies use cheaper materials for their production, thus reducing their costs and at the same time reducing the quality of the products they offer.
Companies do these things simply because it works. Consumers tend to focus more on price than size. In many cases, people do not realize that the product they bought is smaller or of lower quality.
Not all size changes are the same, some may be imperceptible, such as increasing the size of a slit in the bottom of a jar or trimming the corners of a bar of soap. It is very difficult for consumers to detect size changes when they occur in three dimensions. Even so, consumers could react negatively. When raw material costs rose and inflation was in the news, consumers were very likely to accept that companies should pass some of those increases on to them. It's even possible that they preferred smaller products to higher prices.
Now, more recently, headline inflation has settled down after peaking in July 2022, and consumers are less likely to accept shrinkflation now that companies are facing less severe cost pressures, especially since corporate profits for food companies are very high. It may be that if shrinkflation continues, consumers will simply feel cheated.
The value of cryptocurrencies, and bitcoin in particular, is affected by shrinkflation. Ultimately, shrinkflation is a form of inflation and therefore affects central bank monetary policy in the same way. There are always winners and losers in inflationary processes. Inflation benefits those who owe money because it reduces the real value of their debts. On the other hand, inflation hurts those who keep their money in banks because their savings lose real value. Now, how inflation affects cryptocurrencies and especially bitcoin. When inflation rises, central banks raise interest rates to reduce the amount of money in the economy, which is a contractionary policy. This affects investors' liquidity as loans become more expensive. In this high-interest situation, some players may prefer to deposit their money in the bank instead of buying cryptocurrencies, which can cause their value to fall. However, if inflation goes down, central banks can lower interest rates, which makes it less advantageous to have money in the bank and it is better to buy bitcoins, which will increase the value of this cryptocurrency. We saw this phenomenon recently when the Federal Reserve, faced with a reduction in inflation in the United States, decided to lower interest rates and the price of bitcoin skyrocketed.
Some also see bitcoin as an asset similar to gold, since its supply is not subject to central banks. In times when the inflation rate exceeds the nominal interest rate and therefore the real interest rate is negative, many investors turn to cryptocurrencies to protect themselves.