Inflation Is Only One of the Flations You Should Be Concerned About As a Consumer
Inflation, or a sustained rise in prices, has been increasing dramatically over the past year. Prices have been going up at their fastest rate since the early1980s, rising 7.9% in February and 6.4% over the last 12 months.
Driven by supply chain disruptions, labor short ages and consumer demand after the pandemic, most of us started to feel the pinch of increased prices immediately. This economic squeeze often leads to a reduction in consumer spending, and that can be bad for firms andthe economy.
Companies face their own rising prices, such as costs passed on from suppliers, transportation expenses or increased wages. Many firms are still feeling the effects of the pandemic where sales deteriorated (e.g. retail, travel) and consumers were finding alternatives (e.g. home entertainment). Being competitive in this environment has been difficult, and while firms want or need to pass along costs, they are concerned that increasingly fickle and price-sensitive consumers won’t pay for it. Therefore, companies are searching for other ways to remain profitable.
One method firms use against inflation and price-sensitive consumers is to keep prices at a similar level, but reduce other component parts of the product that are not as noticeable. These are the other “flations” that creep up on us and we often don’t know it’s happening.
These are: Hideflation, Shrinkflation, and Skimpflation.
HIDEFLATION
Normally termed hidden inflation, this type of inflation occurs in the form of hidden fees and surcharges that are not always obvious and are not included in the advertised price. This flation hit a high at the start of the pandemic, with businesses such as restaurants including“Covid-19 fees” due to their extra costs, up to20-30% in some large cities.
Recently I was booking an international airline flight and was charged for a “seat booking” which apparently is a cost to reserve your seat (I thought I was doing that?). This additional amount was between $25-$60 per seat, for each of the four connecting flights. There was an extra $200 for a second bag (each way, with strict size and weight limits),and a fee for using a credit card (how else does a person pay for a flight?).
These hidden fees have also been called “junk fees” and in the case of airlines the Department of Transportation is investigating the issue. The hotel industry has increased hidden fees (e.g. resort fees, cleaning fees) and in the financial sector the Consumer Financial Protection Bureau is looking at some of the exorbitant late or overdraft fees charged. For consumers, this can be confusing and frustrating, and several watchdog groups and government agencies feel that by not providing price transparency it hurts consumers in making informed choices
SHRINKFLATION
Shrinkflation is the process of items being reduced in size or quantity while prices remain the same or even increase. It is commonly found with food, beverages, and disposable products with high turnover.
For example, consumers may find less sheets in a roll of paper towels, less pet food in a can or an ounce less cereal in a box. While shoppers may be price sensitive, they may not notice subtle changes in packaging, or read the fine print on the size or weight of a product. The result is consumers getting less for the same price. Also called package downsizing, it has been a strategy common in marketing, but it gained momentum during the pandemic and now with inflation.
For shoppers to truly knowhow much product they are getting, they should look at the unit price. Research in this area suggests that we don’t usually look at unit prices, even though they have been legally required since the1970s (although this varies by state).
Examples of shrinkflation abound, one study in the UK found that nearly 3000 food products found in a typical grocery store have shrunk since 2012. Recent examples include Hershey, that used unusual package sizes like 8.94 ounces for a bag of assortedchocolates. Frito-Lay reduced the amount of chips in Doritos bags, from 9.75 ounces to 9.25 ounces, or about five fewer chips. Cresttooth paste shrank from 4.1 ounces to a 3.8 ounces tube, and Charmin’s mega rolls shrank from 264 double-ply sheets per roll to 244.
Sometimes shrinkflation can be hidden and promoted as something else, like when Bounty switched to smaller paper towels but suggested the reason was, they are now more absorbent. Gatorade adopted a new bottle design, that downsized in volume from 32 ounces to 28 ounces, saying the bottle is better for consumers because “it’s more aerodynamic and easier to grab.”
However, it makes one suspicious of the true motives.
Shrinking or downsizing a package in the United States is legal, and often the empty space in a package that we may lament as ‘paying for air’ serves a purpose. For example, in a bag of chips the air has shipping and handling benefits so the chips don’t break, or a bottle might need additional space for machinery to insert and fill it. Bottom line, if a package is clearly marked, even if it holds less than it did before, it is the responsibility of the consumer to do the math.
However, companies can face legal and consumer backlash over some of these decisions. McCormick paid $2.5 million in 2021 to resolve claims when they sold less black pepper in the same-sized cans. Mondelez famously faced legal action in 2017 when they put more space between the peaks of their Toblerone candy bars, they then reverted to their original version
SKIMPFLATION
This type of flation is often termed “shadow inflation” and differs from the previous two as it focuses on a reduction in services or service quality.
Examples can include longer lines or wait times, less employees, less menu options or less included, poorly stocked vending machines or condiment sections in restaurants. Hotels may not have daily cleaning services, or perhaps the “included breakfasts” only have a few boxes of cereal on a table.
Augmented services are part of the product we purchase when we buy the actual or primary product. For example, when buying a car, the car is the actual product, but other additional services may sway our purchasing decision, such as warranty, financing, after sale service, and so on. The same holds true with services such as flights, where we normally expect other services, for example smooth and efficient ticketing, meals, drinks, in-flight entertainment, clean seats, etc. It is these additional augmented services that are often sacrificed when firms feel inflationary pressures.
A recent flight I took last year was cancelled 30 minutes prior to departure, no employees were available, the lone customer service desk was overwhelmed, and no answer on the toll-free line. Even weeks after the flight, I attempted to reach the customer service department digitally and was given a “we can’t help you right now” message. I had no recourse with any of the touch points within the company.
Recently while grocery shopping, we wanted to know the price of an unmarkeditem and could not find an employee, after a search to find a bar scanner, we noticed it had been removed and we’re now required to download an app to find the price. Most of these service reductions are not being measured when calculating inflation. There are attempts to track the changes in the physical product quality, known as hedonic adjustment, such as the value a backup camera adds to a car. But changes in service quality and especially augmented services are ambiguous and hard to measure. One person’s interpretation of quality enhancement is another’s decline, such as the self-checkout at a grocery store. Is this a valuable private and time-saving feature, or is it a loss of personal touch and additional work for the customer?
These additional reductions in value are part of the reason inflation bothers us so much, it’s not just prices, it’s the less obvious shortages and frustrations that are part of the problem. When we take into account these additional methods firms use to save money, I think inflation is much worse than we realize. If the labor shortage and supply chain issues are rectified, it will be interesting to see if firms respond by increasing service, reducing fees or even reducing prices. However, it is much easier to eliminate fees than to lower prices, as higher prices are often “sticky” meaning that it is unlikely they will re-adjust down, even if market forces warrant the adjustment.
Of course, there is no obligation for companies to keep their products and services the same size or quality, and there is no obligation for shoppers to buy them. Perhaps the best thing a firm can do is to communicate openly with consumers when changes have been made, at least that way we know it’s happening.
