What is Shrinkflation? Characteristics, Issues, Causes & More | UPSC Notes

Shrinkflation basically refers to concealed inflation whereby the actual product size or quantity shrinks but its price is kept constant. The business does not raise the retail price to reflect the increased cost of the inputs from raw materials to transportation and labor; instead, they quietly reduce the amount of what they sell. A chocolate bar that used to weigh 100 grams now weighs only 90 grams but costs the same. Shrinkflation tends to be rampant in food, drinks, toiletries, and housewares. The practice is generally less visible than the announcement of price rises. It is also not easy to observe.

It gives producers the opportunity to retain profit as there would be no outcry from consumers because of perceived price increases. However it fuels consumer mistrust and anger as the size goes down with time.

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Characteristics of Shrinkflation

These are the following characteristics of Shrinkflation:

• Hidden Inflation: The worry of shrinkflation is not reflected directly in the conventional measures of inflation, such as CPI, because the price of goods still remains unchanged. This has the effect of hiding the real pressure of inflation on consumers in order to produce an environment in which inflation is understated.
• Purchasing Power Erosion: Consumers are paying more per unit of the product, though that is not visible in the short-term economic statistic. Overtime, though shrinkflation subtracts value from the medium of exchange: money, it denies consumers the purchasing power.
• Impact on Household Budget: Shrinkflation, or decreasing but not the price, shrinks the budgeting level of middle and lower income levels. Indeed, households in the country spend more on most goods, a significant portion of which are considered as essential. Hence, again, shrinkflation would make it difficult for middle- and lower-income customers to afford their living standards as the same quality of goods will be bought with more money.
• Gradual Financial Drain: Shrinkflation has a gradual, progressive financial burden on families. Because price inflation happens subtly, the reduced income is experienced gradually, which makes it challenging to adjust the spending habits of a household overnight.

Example of Shrinkflation 

A strategy in which the size of the product reduces while the price remains the same is called shrinkflation. For example, leading firms in potato chips reduce the chip packets size from 50 grams to 45 grams while charging the same amount. Similarly, soap brands reduce the bar size to 135 grams from 150 grams while still charging the old price to the consumer. Even dairy products, for example, butter, have reduced in size- 500 grams is now 450 grams. In this way, the firms manage rising production costs without raising the price of the products in a very clear manner, which still indirectly goes into the pocket of the buyer.

Inflation Targeting in India

Inflation targeting is the kind of monetary policy some central banks, like the Reserve Bank of India (RBI), follow in order to anchor their prices through the control of inflation. For example, RBI sets up a range-based inflation target for India so as not to let inflation get in its hands. And so, targeting inflation simply allows the central bank to control the economy and create an environment for sustainable growth. Inflation targeting is, thus, a tool that controls business and consumer inflationary expectations; hence, one may predict the trend of inflation. It is therefore observed that predictability of an inflation trend is the main objective before the central bank to enable better long-term planning across the economy.

The inflation, more so in India, is basically addressed by a framework referred to as Inflation Targeting (IT). This is implemented by the RBI in tandem with the Government of India. Under this framework, the RBI uses the various monetary policy instruments to contain inflationary shocks within a set range in order to balance price stability with economic growth.

• Inflation Targeting Framework: In 2016, the Government of India and Reserve Bank of India enacted the Monetary Policy Framework Agreement. The inflation target is set at 4%, but the government accepts the tolerance band of ±2%. This implies that the ideal inflation range would be 2% to 6%.
• Monetary Policy Committee: With the Monetary Policy Committee (MPC) instituted in 2016, every six weeks, the repo rate-the rate at which RBI lends to commercial banks-is determined, and this, in turn, guides every other rate in the economy based on inflation trends. The MPC has six members representing RBI governor along with other external experts, and it holds a meeting two months in a year and watches the inflationary conditions to build a policy.

Conclusion

Shrinkflation is a global phenomenon, which has been fast gaining ground in India wherein the manufacturing group faces increased production costs and pressures of inflation. Although the strategy permits such companies to carry profits without increasing prices, consumers bear the hidden burden indirectly. Shrinkflation causes erosion of consumer trust in this price-sensitive market in India, affecting family budgets mainly in respect to essential goods. This is a situation that calls for greater awareness, transparency, and regulation, so that consumers are spared the long-run effects of the practice and price-fairness-through inaccuracy, equity, and otherwise.

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