With all the currency drama over the last few years, I hear a lot of people saying that the weak Rand must eventually hit consumers as inflation.
But inflation does not only have to take the form of higher prices.
I was out for lunch with my grandparents recently, and they were asking me about when they would see the inflation caused by the weaker exchange rate. My answer went something like: “Oh, it’s happening already. Some things are a bit more expensive – but mostly, you’ll see that the package sizes are starting to shrink.” At which point, my gran did say how much thinner the salmon-trout terrine at Woolworths seems to be getting.
Here is some math:
- A Mars chocolate bar used to cost R10.
- It now costs R10.60.
- That’s 6% inflation. And that’s how it feels in your shopping basket.
- But as it turns out, the Mars chocolate bar used to weigh 58 grams, whereas the new bars weigh 51 grams.
- In terms of price per gram, a Mars chocolate bar used to cost 17 cents per gram.
- The new bars now cost 21 cents per gram.
- That’s an effective inflation rate of 24%.
In many ways, one of the easiest ways of passing inflation on to customers is by decreasing the package size. Many customers don’t look too hard at the product weights; there’s usually math involved, so only the hyper-OCD will pull out their pocket calculators; and the real important point is that you’re dealing with the denominator. If you hold the price constant, a 10% reduction in product weight results in an effective 11% increase in price.
It’s sometimes called “shrinkflation”. Also: “stealthflation”. There are two really great articles about it by Russell Lamberti over at mises.co.za:
And here are some images of it happening in practice:
I mean – you don’t need inflation for product sizes to get smaller. But usually, competition means that the FMCG industry is reluctant to start cutting sizes. But when everyone is forced to do it by higher input costs, then it starts to proliferate.
On the upside, smaller Mars bars means less calories. So perhaps we’ll lose some weight.
PS: if anyone has any before and after images for this kind of thing happening here in SA, feel free to mail them in! It’s [email protected]
Rolling Alpha posts about finance, economics, and sometimes stuff that is only quite loosely related. Follow me on Twitter @RollingAlpha, or like my page on Facebook at www.facebook.com/rollingalpha. Or both.