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Shrinkflation is Inflation’s Ugly Little Sister – What it Means for the Retail Investor

Dear Retail Investor,

Have you ever bought a bag of chips but once you opened it, felt like the bag wasn’t even half-full? Or perhaps you grabbed a smoothie after a workout and finished it in little more than a few sips, leaving you feeling that the price you paid was not really worth it?  This phenomenon tends to cause indignation amongst consumers, as it can leave them feeling cheated or ripped off – but as a retail investor you should also be paying attention to what it means for your portfolio. 

Shrinkflation, which is when businesses sell less of a product for the same price or even charge more for less product, was first coined by British economist Pippa Malmgrem in 2009, but it has appeared in the economic lexicon more frequently since the pandemic began. 

Recently shrinkflation has been occurring in supermarkets as products such cereal, soft drinks, soap and other packaged goods have risen in cost while portion sizes have been reduced. Shrinkflation is spilling over into restaurants too: supply constraints in the food procurement sector have resulted in higher supply costs for restaurants, who in turn pass those costs on to consumers by charging higher prices. Further, labour shortages as a result of the pandemic have given restaurants additional headaches as they have struggled to hire staff and have ultimately been forced to offer higher wages to entice potential employees. This would normally drive prices up, but some businesses have decided to reduce the portions of their menu items rather than hike up prices. This is still a type of inflation and arguably it is a precursor to further inflation in the future.

Breaking Down Inflation – a Quick Look at CPI (Consumer Price Index)

According to the US Bureau of labor statistics, the July 2021 12-month percentage change for ‘food away from home’ is 4.6% under the CPI chart. CPI uses a fixed basket of goods to measure prices of goods against a base period, which includes food in the basket. For example, let’s say a Milk Company sells 1.75 litre cartons of milk at $3.00, but then decides to slightly modify the carton and decrease the quantity to 1.65 litres, an unnoticeable amount to the consumer. Milk Company then sells this carton for the same price as the 1.75 litre carton.  The price has not changed but you are paying the same amount for less. CPI will still count this as inflation because it measures food on a price per volume basis. Shrinkflation is a kind of loophole for businesses to mask price increases by redesigning their packaging, to give consumers less product while maintaining their margins.  

The costs of goods are also increasing substantially because of supply shortages, increases in transportation costs, and a slew of recent crop failures. For example, Feeder Cattle futures price are up approximately 23% since the pandemic began, due to an increase in grain prices as a result of draughts and pent up demand for beef as more restaurants reopen. CTV reported that beef prices are already up 10% for 2021 and it is expected they will increase even more. As a result, restaurants also have to buy at these inflated prices and must sell them to you at much higher price than before the pandemic in order to make a profit. Add in the aforementioned labor and transportation issues. and there is a recipe for paying more for a whole lot less.

Is Shrinkflation ‘Transitory’?

So is this shrinkflation phenomenon ‘transitory’ –  the Fed’s chosen word of the year with respect to inflation – or will it accelerate and persist? A CBS article points to one analytics firm that believes shrinkflation will persist because of the imbalance of supply and demand as economies reopen. If companies are going so far as to put the time and money into modifying their packaging to give consumers less while charging them the same prices, it’s reasonable to assume shrinkflation is not transitory, but rather more likely to be prolonged. Businesses will always pass costs on to consumers, and what better way to do so than by tinkering with the quantity of the product sold? Prices are sticky, according to modern economic theory, but that does not mean quantity is. Therefore, you can expect that 6 oz beef patty at your favorite burger joint to quietly turn into a 5oz patty, a 16% decrease in beef consumed, and you will likely not even notice it.

What Does Shrinkflation Mean for Investors?

From an investor perspective, this type of change in business practice is a bellwether to what is happening to the macro economy. If you feel like your purchasing power is diminishing at a grocery store or restaurant, you are likely already noticing shrinkflation, and you’ll probably want to protect your purchasing power and your wealth by planning ahead. 

To protect yourself from inflation the best asset classes to increase or gain exposure to are real estate (either buying real estate directly and renting it out to earn income, or by investing in a REIT), commodities like gold and silver, and inflation-linked bonds, such as TIPS, or Treasury inflation-protected securities. You should also consider buying the good old S&P 500, a rotating index of the 500 largest U.S. public companies that is considered the best gauge of large-cap U.S. equities. These days it is mostly comprised of capital-light businesses such as technology and communications services companies, which tend to fare well in inflationary periods.  

Cryptocurrencies can also be a potential hedge from inflation as it is considered deflationary, meaning there is a fixed supply that cannot be manipulated the same way that the Fed manipulates the supply of fiat currencies. However, cryptocurrency is still in the infancy stages of becoming a bona fide medium of exchange or asset class and is very volatile. There are also plenty of fly-by-night cryptocurrencies in existence, so be sure to look into any potential cryptocurrency purchases very carefully – Bitcoin (BTC) and Ethereum (ETH) are still considered the ‘gold and silver’ standards, respectively, of the cryptocurrency world.  

Sincerely,

Alex Muir, CFA
Dear Retail contributor

 

Disclosure: This article is not investment advice and the opinions are of the author and may contain forward-looking statements. Please do your due diligence and/or seek professional investment advice for any investment decisions made. This author currently does not own any of the equities mentioned in this article.

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