Shrinkflation?
by Dr. Doug Cardell
I’m not going to get into a debate about President Biden’s mental capabilities. I’m an economist, not a neurologist. However, Biden’s Super Bowl LVIII message was an economic message, and it was wrong. If you didn’t catch it, shrinkflation is a term that is used to refer to the practice some companies use to lower package size and keep the price the same. Biden’s economic team apparently either doesn’t have an understanding of inflation or sent the President out on national television to lie about it. The fundamental ideas about shrinkflation are incorrect. While it’s true that many companies are reducing package sizes, it is incorrect to say that they are keeping the price the same. The price may look the same, but it’s not. In the time the Biden administration has been in office, inflation has risen 18% according to the Bureau of Labor Statistics. That means that an item that sold for a dollar in 2020 now costs $1.18. So, the purchasing power of the dollar is reduced by $1.00/$1.18 = 84.7%, a loss of 15.3% In his Super Bowl ad, Biden referenced ice cream. Let’s use that as an example. Tillamook Ice Cream reduced its tub size from 56 oz. to 48 oz. and kept the same price. Is this a scam, as the President alluded? No! The size reduction is 14.3%, but inflation has reduced the purchasing power of the dollar by 15.3%. Now, a tub of Tillamook Ice Cream actually costs 1% less than it did three years ago even though the price didn’t change. Tillamook could have raised a 56 oz. tub from $5.32 to $6.28 to account for inflation. That’s a price increase of 1.7 cents per ounce (6.28/56-5.32/56). Instead, Tillamook reduced the package size to 48 ounces. That’s a reduction of 1.6 cents per ounce (5.32/48-5.32/56 =.0158). That means that Tillamook Ice Cream costs 1.6 cents less per ounce than it would have if Tillamook had raised prices to account for inflation. Tillamook is not charging the same price as it had before the inflation. The number is the same, but the price per ounce has changed due to inflation. Tillamook is innocent, and the Biden administration is guilty regarding the effects of inflation. Furthermore, the implication that Tillamook is unfairly profiting by the is clearly incorrect. Tillamook’s revenues are actually down almost 33% ($938,600 to $617,200) since 2020, largely due to the effects of inflation on sales. In addition to this false information, the Biden administration is touting the current lower inflation rate as having solved the problem. Let me expand a bit on my previous article, What Causes Inflation. The administration is playing on a common misunderstanding that is often used, in many contexts, to mislead people. It’s the difference between rates and levels. It’s an easy concept, but it’s often manipulated. Let’s use an analogy to understand inflation better. Imagine you are filling a large tank with a hose. Let’s assume the tank holds 100 gallons when you begin; the amount of water in the tank is the level. Now, you open the fill valve to 4.7 gallons per minute; that’s the rate of flow, the same as the inflation rate in 2021. After one minute the level has now increased to 104.7 gallons, the same as the accumulated inflation in 2021. Now, you increase the flow rate to 8 gallons per minute, the same as the inflation rate in 2022. After a minute the level in the tank is now 112.7 gallons, the same as accumulated inflation in 2022. Now, you set the flow rate to 4.1 gallons per minute, the same as the inflation rate in 2023. After a minute, the level in the tank is 116.8 gallons, the same as accumulated inflation in 2023. Now, you set the flow rate to 2.9 gallons per minute, the same inflation rate as January of 2024, but you only let it run for 5 seconds since January is only 1/12 of a year. So, the level in the tank rises by .24 gallons to 117.04 gallons, a total level increase of 17.04 gallons in 3 1/12 minutes, just like the total inflation level has risen 17.04% in 3 1/12 years. Here's a graph:
Now, you turn the flow rate off. What happens to the water in the tank? Obviously, nothing. If nothing happens to fill or drain it, it will stay at a level of 117.04 gallons forever. Inflation works the same way; since January 2021, when President Biden came into office, using this analogy, inflation has risen 17%. The Consumer Price Index (CPI), a measure of inflation, rises at different rates each year but the level of inflation is the total rise in the CPI. Some of you may have noticed that in the first paragraph, I said total inflation was 18%, and in this paragraph, I said 17%. The difference is because in the water analogy I computed inflation using years so I could show it step by step. To be absolutely correct I would have to calculate monthly, but 36 months would have made it less readable, but I assure you that 18% is correct when calculating by month. When computing things that compound, like interest or inflation, the length and number of the compounding periods make a difference. Now, that you see how inflation works, you can see that the administration and the media report the flow rate, not the level. If the inflation rate went to zero tomorrow, prices, the inflation level would stay the same forever. Of course, reducing the inflation rate is a good thing, but the administration’s implying that because the rate is lower, price levels will decrease by that amount is false. The price of an ounce of Tillamook Ice Cream is not going to go back down, ever. The inflation that caused the price per ounce increase is permanent. The administration inflated the money supply, reducing the value of the dollar and causing price inflation. Therefore, prices, like water in a tank, are inflated and will stay that way unless something happens to drain the tank. That happens occasionally in depressions and recessions but usually by very small amounts, as is evidenced by the overall inflation of the last 50 years. Despite the Biden administration’s attempt to transfer the blame for shrinkflation to the companies that are forced to raise prices due to the dollar’s loss of value because of the inflation of the money supply, the fault rests entirely with the Biden administration, and the attempt to transfer the blame is at best disingenuous and at worse deceitful. The government and those members of the media that repeat its talking points are misinforming you.
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