Value Deflation

Key Takeaways

• Value deflation involves businesses reducing product value to avoid raising prices.
• Shrinkflation is when package sizes are reduced but prices remain the same.
• Value deflation may not be captured in official inflation statistics like the CPI.
• Companies use value deflation as a strategy to maintain price points amid rising costs.
• Misleading changes in product quality or quantity pose challenges in inflation measurement.

What Is Value Deflation?

Value deflation, or shrinkflation, occurs when retailers and service providers cut their costs and sell smaller packages, give out smaller portions, or generally provide less for the same price. Businesses may do this as a way of stealthily raising prices when costs are rising during periods of inflation and consumers are particularly price conscious.

Economy-wide value deflation is actually a form of price inflation to the extent that it results in lower real consumption at the same price level. Value deflation can lead to an understatement of the rate of inflation and the cost of living if it isn't accounted for in the calculation of price indexes.

Value deflation is a form of "hidden inflation," reflected in qualitative changes that are difficult to track with traditional inflation indexes. Companies may choose to cut corners on their assembly lines to produce less durable goods, or they may introduce preservatives to extend the shelf-life of what was previously sold as fresh produce.

Consumers need to understand value deflation so they can recognize these changes in their everyday purchases and the effects they can have on financial planning.

How Value Deflation Impacts Consumers and Businesses

Value deflation is a way of raising prices, so the consumer is less likely to notice, and it can take the form of reductions in the amount of food in a typical package, reduced portion sizes at restaurants, increased wait times, and reduction in customer service and support, or switching to lower-cost ingredients or materials.

It can be a successful tactic because a lot of shoppers are more sensitive to a price change than to a quality change. From a marketing standpoint, shrinking packages is better than raising prices in order to maintain a consistent price point.

But value deflation can backfire, as Kraft discovered when it shrunk its Toblerone bar in 2016 and made headlines in the United Kingdom.1 British food retailers have made such extensive use of value deflation to compensate for the weak pound and the increased cost of imported ingredients that shrinkflation has become a phenomenon. Over 2,500 products were subject to value deflation from 2012 to 2017, according to the Office for National Statistics.2 In 2021, in the U.K., Walkers removed two bags of crisps from its 24-pack but kept the price the same at GBP 3.50.3

Hidden Effects of Value Deflation on Inflation Metrics

Value deflation may not show up in inflation measures such as the consumer price index or the retail price index. Many economic statistics agencies use quality adjustment processes to isolate price movements from the changes in a product's weight or quality, so in there it should still show up as a price rise in official inflation statistics.

However, many of the techniques of value deflation may, by design, be difficult to measure. Manufacturers might switch to lower-cost inputs without greatly changing the product. For example, a hot cocoa maker switches to a less expensive sweetener, or a maker of grated cheese products might increase the wood pulp filler content of its products. This may reduce the quality for some customers, but despite the lower quality, it might not be enough for them to change their behavior. Other consumers might not notice the change at all. This may or may not be caught by official data and statistical agencies.

In particular, cutbacks in services or reductions in the quality of ingredients and materials may be difficult or impossible for consumers and statisticians to account for and adjust for. For example, a hotel might direct its cleaning staff to reduce the amount of time spent cleaning per room, resulting in a decline in cleanliness, or a consumer electronics maker might switch to a lower cost customer support provider, resulting in increased call wait times or lower quality service to its users.

Whether value deflation amounts to the "perfect business crime," or not, consumers around the world should be on the lookout for these packaging tricks. The question is, how far can big fast-moving consumer goods companies take value deflation—and risk damaging their brands—before they are forced to raise sticker prices or face squeezed operating margins.

What Are the Reasons for Value Deflation?

The primary reason for value deflation is the increase in production costs, but without wanting to pass these costs directly on to consumers in the form of higher prices. So, they can keep the price the same but reduce the size of the product, as in the case of shrinkflation.

What Is Deflation vs. Value Deflation?

Deflation is when prices drop in an economy, and is the opposite of inflation.

Value deflation is actually a response to inflation, whereby higher costs induce producers to cut back on their offerings to customers in some way.

Is Value Deflation Accounted for in the CPI?

The CPI, or consumer price index, is a measure used to gauge inflation by tracking the price changes of a basket of consumer goods. However, it cannot account for things like reduced quality of a product, shortened shelf-life, shrinkflation, or other forms of value deflation. As a result, these types of "hidden inflation" can be missed from official figures.