With prices still at elevated levels – even if they aren’t rising as fast as they were a few months ago – inflation is a hot topic. Key types of underlying inflation include:
- Demand-pull inflation is a type of inflation that occurs when there is more demand for goods and services than there is supply. This can happen when the economy is growing rapidly, or when there is a sudden increase in demand, such as during a war or natural disaster.
- Cost-push inflation is a type of inflation that occurs when the cost of producing goods and services increases. This can happen when the cost of raw materials, labor, or energy increases.
- Built-in inflation is a type of inflation that occurs when people expect prices to rise, and they raise their prices accordingly. This can create a self-fulfilling prophecy, where prices continue to rise even if there is no underlying economic reason for them to do so.
Companies are adapting in ways that have given rise to some additional ways to understand behavior during an inflationary period:
- Shrinkflation is when companies reduce the size or quantity of a product while keeping the price the same. For example, a bag of chips might shrink from 10 ounces to 8 ounces, but the price of the package would stay the same. Often, the goal is to shrink the packaging in such a way that the consumer doesn’t notice the change perhaps by including more air in the package or by changing the shape of the package so that it is not immediately comparable.
- Skimpflation is when companies reduce the quality of a product while keeping the price the same. For example, a company might use cheaper ingredients or lower-quality manufacturing processes to make a product or a hotel might offer less frequent housekeeping or reduce included services in some other way.
- Excuseflation is when companies raise prices and blame it on inflation, even when inflation is not the main cause of the price increase. For example, a company might use consumer expectations about rising prices as an opportunity to raise the price of its product by 10% and then just say that it's because of inflation.
How consumers respond to these strategies matters too. Shrinkflation and skimpflation can lead to consumer dissatisfaction, which can hurt sales and cause them to seek out a competitor’s offerings. Excuseflation can erode consumer trust, which can make it more difficult for companies to justify future price increases.
So what happens post-inflation? While prices of like-products do not often come back down on their own, competitive pressures can bring them back down or steady the change over time. Additionally, product innovations, and changes and in product size offerings and other features can reintroduce value.
Freedonia Group analysts will continue to watch for pricing trend changes and the reactions and responses all along the supply chain, from material suppliers to producers to shippers to distributors/retailers, and ultimately consumers.