Domestic Economy

Shrinkflation Unaccountable

Shrinkflation UnaccountableShrinkflation Unaccountable

A single-digit inflation was registered for the second consecutive month this year.

According to the Central Bank of Iran’s latest report, the goods and services Consumer Price Index for urban areas reached 9.2% in the 12-month period ending July 21.

Technically, this implies a boost in purchasing power, as prices are rising slower than at any point in the past quarter century. However, the general public is heard complaining that the cost of living is rising and the standard of living is dropping.

So why is there such a jarring gap between the official inflation data and people’s take on their economic conditions? One possible answer could be traced to the phenomenon called “hidden inflation”.  

Business dictionary describes hidden inflation as “product quality or quantity that decreases despite a decline in price. Hidden inflation occurs when products remain at the same price, yet are offered in low numbers or with lower quality.”

Hidden inflation can be spotted in packaged goods where the number of items is lower or total weight is less.

For instance, you may open a bag of potato chips to find there are fewer chips than when you had purchased in the past. You buy a liter of milk, the amount of calcium is lower than the standard level. Breads are smaller in size and don’t taste as they use to.

In unpackaged goods, hidden inflation emerges as a drop in the quality of items, an article in the Persian daily Etemad reads.

Economist Pippa Malmgren has coined another word for hidden inflation, i.e. “shrinkflation”.

“Shrinkflation is not really a term in economics but it describes a phenomenon that we have seen before, which is when the size of packaging stays the same, the price stays the same, but the thing inside is getting smaller,” she told BBC.

CPI is calculated by measuring the changes in the average price of a basket of goods over a period of time. The index measuring system has slight differences in every country, but the core of it remains the same. However, shrinkflation renders the calculations unreal.

Government statisticians assume products are constant in size and weight from month to month and have no mechanism to adjust the rate of inflation for quality or content changes.

“There’s a big debate about how well central banks capture the qualitative changes in things, but the bottom line is, until the price actually goes up, the models don’t really pick up the price changes,” Malmgren says.

“Why are companies doing it is because their input costs are going up; that’s the sign of inflation pressure in the system,” she added.

When raw materials cost producers more, producers sometimes react not by raising prices but by charging the same price for a package that contains a bit less.

Sadly, Iran is in the grip of this very crooked phenomenon. You can’t find an Iranian who has not encountered a case of shrinkflation in their lives. This is because shrinkflation has the same fundamental effect as inflation, which is erosion of people’s purchasing power, i.e. they buy less for the same amount of money.

There is enough proof that hidden inflation is one of the byproducts of state-run economies. Hidden inflation is not only a bitter economic realty, it is also a cultural issue.

The Central Bank of Iran needs to take notice of the phenomenon as much as the changes in CPI. In the past years, there has been significant discrepancy between costs of living and CPI.

The inflation rate might have been curbed but hidden inflation is roaring ahead and unfortunately what oversight bodies are doing to combat this phenomenon is not enough.