What is contraction? Australian examples, how it relates to inflation and why does it happen
But there is another impact on the cost of living: shrinkage.
The term has been popularized in recent years, used to describe when real consumer costs rise despite the retail price of products remaining stable.
Shrinkflation is a term for when the price of a product remains the same, but the amount of product you receive decreases.
So, for example, if a $3 block of chocolate contained 200 grams but is later modified to include only 180 grams, this would be a case of shrinkage.
How is shrinkage related to inflation?
Shrinkflation is not separate from inflation, it is actually a specific part of it.
When the Australian Bureau of Statistics calculates the Consumer Price Index (CPI) – the measure used to reflect the rate of inflation – it does so by looking at the cost of what it calls a “fixed basket” of goods and services.
This basket is not actually fixed though.
It’s updated in a number of ways, including to account for “quality change” – where the content of a product changes, even if the price doesn’t change.
It is under this umbrella of quality change that shrinkage is reflected in the CPI.
“Using transaction ‘scanner’ data in the Australian CPI, which provides detailed item information, allows the ABS to identify and adapt to quality changes resulting from the contraction,” indicates the office.
The example he uses is a beverage bottle that costs $3 but is increased in volume from 750ml to 675ml.
While the price of the product remains the same, the ABS calculates a 10% price increase, which is then used in the CPI.
What are some examples of shrinkage?
Shrinkage, according to ABS, is often found in groceries, which is why it’s most commonly seen on supermarket shelves.
One example is Weet-Bix’s economy packs, which initially dropped in weight from 1.5kg to 1.2kg before dropping back down to 1.12kg.
Similar shrinkages have occurred with other Australian staples: a block of Cadbury Dairy Milk chocolate used to give you 250g before dropping to 180g; Mars bars reduced from 53g to 47g; and boxes of Pringles now contain 134g of crisps, when they used to contain 160g.
Why does shrinkage occur?
Shrinkflation is the result of rising costs for manufacturers; it costs them more to produce the product, and so the amount of product they can sell for the same price decreases.
“It’s hard to get mad at the companies themselves for this, because the price of raw materials that go into food has gone up along with everything else, and so has inflation,” explained Chris Kohler, financial reporter at 9News, last month.
“Wheat, dairy, cocoa, everything has gone up, and companies have a choice: do we increase the price or reduce the size of the items?
“Some… have both gone down and up in price.”
Does it only apply to groceries?
No. While we usually associate shrinkage with groceries, it can happen across a range of products.
More generally, the ABS makes quality change adjustments on about two or three percent of the products in its fixed basket for the CPI each quarter.
Most of these changes are actually happening in sectors like apparel and furniture, which both account for more than 4% of the adjustments made each quarter, while food products account for just over 1%.
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Who coined the term “shrinkflation”?
British economist Pippa Malmgren is widely credited with coining the term contraction.
On Twitter in 2015, she wrote that she “believes” she was the one who made it up.
“I never learned it, but I use it a lot,” she said.