Shrinkflation

Shrinkflation is the practice of reducing the size of a product while maintaining its sticker price. This raises the price per given amount of that product. Shrinkflation is a form of inflation that occurs mostly in the food and beverage industries. 

The "shrink" in shrinkflation relates to the change in product size, while the last part of the term refers to inflation or the rise in the price level.

Most consumers won't necessarily check the size of a product but will notice if the price rises. For example, someone who loves potato chips may not notice if their favorite brand reduces the size of the bag by 5 percent, but will certainly be able to tell if the price goes up by the same amount. 

As mentioned above, shrinkflation usually happens in the food and beverage industries. You’ll probably notice that the price of your favorite candy, chocolate or bag of potato chips has remained nearly the same, but its size has gone down quite a bit since you were a kid. So why does it happen? According to CNBC, higher supplier costs — including commodities and other raw materials, the growing demand from abroad and poor harvests could be to blame. One analyst said it could also have to do with the lasting effects of the 2007-2008 financial crisis.  

For instance, an increase in the cost of cocoa will have a direct impact on companies that produce candy bars. But rather than increase the price of chocolate (and potentially lose customers), the company may choose to reduce the size of its product (and therefore, the amount of cocoa per bar) and keep the price point at the same level. That happened with Mars bars in the United Kingdom when the confection size was expected to drop in size by 20 percent in 2017. 

Britain's Office for National Statistics (ONS) calculates that 2,529 products decreased in size from the beginning of 2012 to June 2017, while 614 increased. The ONS's methodology adjusts for changing product sizes, so shrinkflation theoretically affects the overall rate of inflation. In practice, however, the changes are small and limited to a small range of products, so shrinkflation does not noticeably contribute to price changes. Even within the food and nonalcoholic beverages category, shrinkflation's effects are not visible, though the ONS calculates that the phenomenon did boost inflation in the sugar, jam, syrups, chocolate and confectionery category by 1.2 percentage points from the beginning of 2012 to June 2017, as per the chart below.

Even though most people won't notice small changes to the size of a product, any drastic change may have a detrimental effect on companies concerning consumer sentiment. But eventually, any change will be noticed over time, leading to a loss of trust and confidence. Companies can only make these types of changes so many times before consumers will cry foul. But shrinkflation also makes it harder to accurately measure price changes or inflation, because the price point becomes misleading since the product size can't always be considered in terms of measuring the basket of goods. 

Source: ONS.