What Is Value Deflation?
Value deflation, or shrinkflation, is a phenomenon wherein service providers and merchants reduce their expenses by offering smaller portions, selling smaller packages, or offering less for the same price to keep the sticker price the same. When costs are growing, and customers are very price-conscious, businesses may use this tactic to raise prices quietly.
Since it reduces actual consumption at the same price level, economy-wide value deflation is a kind of price inflation. If value deflation is not considered when calculating price indices, it may result in an underestimation of the rate of inflation and the cost of living.
Value deflation may be characterized as a kind of “hidden inflation,” exhibiting qualitative shifts that are hard to monitor using conventional inflation indices. For instance, businesses may economize on their assembly processes to create less robust products. Alternatively, they could add preservatives to what was formerly offered for sale as a fresh product to increase its shelf life.
Understanding
Value deflation is increasing prices to make consumers less likely to notice. Examples include:
- Decreasing the quantity of food in a typical package.
- Reducing restaurant portion sizes.
- Lengthening wait times.
- Cutting back on customer service and support.
- Switching to less expensive materials or ingredients.
It may be an effective strategy because many consumers are more receptive to price changes than to quality changes. Reducing package size instead of increasing pricing to keep a fixed price point makes more sense from a marketing perspective.
Value deflation, however, may backfire, as Kraft found out when it made waves in the UK in 2016 by shrinking its Toblerone bar. The widespread use of value deflation by British food retailers to counteract the weak pound and rising costs of imported goods has resulted in the phenomenon known as shrinkflation. The Office for National Statistics reports that from 2012 to 2017, over 2,500 goods experienced value deflation. Walkers withdrew two bags of crisps from their 24-pack in the United Kingdom in 2021, although the price remained at GBP 3.50.
Particular Points to Remember
Inflation indicators like consumer and retail prices may not indicate value deflation. Official inflation data should still reflect a price increase since many economic statistics organizations utilize quality adjustment procedures to separate price movements from product weight or quality changes.
Nonetheless, many value-deflation strategies may require more work to quantify by design. Manufacturers may use less expensive inputs without significantly altering the final product. For instance, a producer of hot chocolate may use a less costly sweetener, while a producer of items with grated cheese might add more wood pulp to their offerings. This could mean a worse quality for consumers, but more is needed to get them to alter their behavior. Perhaps no one else will notice the shift at all. Official statistics and statistical agencies may need to include this.
Specifically, customers and statisticians may need to help account for and adjust for service reductions or lower-quality ingredient and material reductions. For instance, a consumer electronics manufacturer may decide to move to a less expensive customer support provider, which could result in more extended call wait times or worse customer service for its customers, or a hotel may instruct its cleaning staff to spend less time cleaning each room, which would result in a decline in cleanliness.
Regardless of whether value deflation qualifies as the “perfect business crime,” customers everywhere must be aware of these packaging ploys. How far can large, fast-moving consumer goods businesses tolerate value deflation, risking brand damage, before they are compelled to hike sticker prices or see their operating margins squeezed?
Why is value deflation happening?
Rising manufacturing costs, which aim to keep customers away from them by raising prices, are the main cause of value deflation. As a result, companies may maintain shrinkflation by lowering the product’s size while retaining the same price.
Deflation vs. Value Deflation: What Is It?
The antithesis of inflation is deflation, which occurs when prices decline in an economy.
Value deflation is a reaction to inflation, in which companies reduce the products they give consumers due to increased expenses.
Does the CPI take value deflation into account?
The consumer price index, or CPI, tracks changes in the prices of a basket of consumer items to determine inflation. It does not, however, consider factors like a product’s lowered quality, shorter shelf life, shrinkflation, or other types of value deflation. These kinds of “hidden inflation” might thus be overlooked in official statistics.
Conclusion
- When companies decrease the value they provide to the client instead of increasing the selling price, this is known as value deflation.
- It may manifest as quality reduction, in which a slightly lower product is marketed as being on par with the previous product, or shrinkflation, in which the packaging or portion sizes are decreased at the same price.
- Value deflation is an inflation factor, especially inflation, that statistics organizations fail to record.
