
How shrinkflation is playing havoc with economists’ models - pseudolus
https://www.economist.com/finance-and-economics/2019/08/06/how-shrinkflation-is-playing-havoc-with-economists-models
======
chewz
Shrinking portions is the simplest way. The other is replacing products.

Say supermarket bakery introduces new bread with seasame seeds only 25¢ more.
Then slowly there is only new seasame seeds bread on shelves and regular bread
becomes rare. Later seasame seeds is slowly dispearing from bread and voila -
you have made regular bread 25¢ more expensive.

The other way is lowering quality of products. Inflation basket still contains
basic bread, tomatoes and plain sausage. The problem is that the quality of
these products tanked and to buy a bread of a quality of simple bread from 40
years ago you must shop in some premium, organic, hipsters bakery where it
costs 10 times more then simple bread. Same goes for tomatoes and sausage.

And electric drills or washing maschines? Don't get me started. Today's Bosch
electric drill lasts one building season, my fathers Bosch electric drill
lasted 35 years. Price is the same or lower but you get way less for it.

But the inflation headline number stays low. And that matters as you can keep
wages low (many pensions are inflation indexed). And as people used to say
under communism -"Bread is more expensive but locomotives got cheaper".

~~~
WalterBright
> a quality of simple bread from 40 years ago

Wonder Bread was popular in the 1960's, 50 years ago.

~~~
simonebrunozzi
Wonder Bread was nothing like quality bread. Quite the opposite.

~~~
WalterBright
Exactly my point.

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hnarn
In Sweden, "jämförelsepris" (comparison price) is mandatory for many goods.
This means stores have to, in addition to price, display "price per gram" or
whatever unit makes sense.

This way, you can quickly compare different groceries despite differing
packages, and shrinking the item for the same price would be visible when
looking at the comparison price.

~~~
lrem
Same EU rule is circumvented by some shops by having the comparison prices in
mismatched dimensions (volume Vs weight Vs unit).

~~~
viraptor
In Australia the misleading part is what's actually weighed. The price per kg
for canned beans doesn't help when 400g supermarket brand is 280g beans, 120g
water. :(

But on average, with pretty much everything else, it works just fine.

~~~
frabert
In Italy, canned foods must display a "dripped"(?) weight, that is the mass of
the contents after the oil/water/whatever has been poured away

~~~
icebraining
Yeah, but is the dripped weight the one being shown on the price per gram
display?

~~~
frabert
No price per gram is displayed, at least in the places I've been to.

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forinti
This is a process Brazilians know well.

Chocolate bars used to have 200g. Some now have less than 100g. Toilet paper
rolls used to have 50m; most now have 30m and some have only 10m.

This sort of thing started happening in the 1980s, because the government had
frozen prices (that always works well). It became such a problem that now the
law says that the packaging must clearly point out if the quantity inside has
changed.

~~~
dane-pgp
I'd also like to see a law passed that requires each product to mention on its
packaging if its ingredients (even just their relative proportions) have
changed. This would apply to things like foods/drinks and also cleaning
products.

Of course companies would protest, claiming that their recipes are trade
secrets, but we already require that products list their ingredients, and we
protect trademarks for products, which seems unreasonable if companies can
alter the contents of what is being protected, without telling customers.

To be clear, though, I'm not actually advocating that the labels report
precise amounts of each ingredient, but they should be forced to say something
like "40% more salt" or "70% more water", at least next to the ingredients,
and "New recipe" on the front (as many products already do).

~~~
ekianjo
> I'd also like to see a law passed that requires each product to mention on
> its packaging if its ingredients (even just their relative proportions) have
> changed. This would apply to things like foods/drinks and also cleaning
> products.

Ridiculous proposition.

Formulations change pretty much constantly for various reasons (ingredients
become more expensive, or you change suppliers, or you decide to adjust
something to make the product better or cheaper or both), and adding
bureaucratic friction as well as packaging redesign is completely impractical.
Packaging can take several weeks if not month to produce and you would have to
constantly throw them away with this kind of rule. Wasteful.

~~~
tzs
That's wrong in regard to food labels. If the formulation has changed in a way
that makes those already printed labels inaccurate, they already have to throw
them away to comply with Federal law and FDA rules.

All dane-pgp's proposed law would change is that when they change the labels
to match the new formulation, which they _must_ do, they would have to include
a change date or a version number of something like that on the new label.

~~~
everybodyknows
A "last-modified" date on the standard nutritional info would be great pro-
consumer regulation.

Now if we could only get a "roasted-on" date requirement for coffee ...

------
bfdm
Walmart plays a heavy part in this game. They have such an outsized share of
the market for Consumer Packaged Goods that they can bully manufacturers. When
economics suggests the price of, say, some condiment needs to increase,
Walmart simply refuses to accept the higher price. You can either lose your
shelf space, or substitute a new, smaller, product format at the same price,
which they will accept.

And so bottles of mustard get smaller, but stay $1.99 at Walmart. Kleenex
boxes have 76 tissues instead of 88 but stay $0.99 at Walmart.

~~~
benj111
You don't need to be Walmart sized. Pound shops in the UK routinely do this
and have nowhere near the clout Walmart do.

------
cco
Next time someone tells you, "Well even the poorest of us today eats better
than a king in the middle ages" think about this quality "inflation". What is
the current cost today of putting high quality, wild meat on the table along
with seasonally ripe and fresh fruit? What about high quality beer with no use
of malt substitutes?

There are a number of measures, availability being one, where our modern food
production system shines but on a quality measure it really falls flat against
many times throughout history. The caveat there is obviously "history" is
gigantic and runs the gamut from poor slaves eating gruel and starving to a
patrician in Rome during its height or to a hunter gatherer in a food rich
environment.

All that to say, I don't think this comparison is so simple, it is incredibly
nuanced.

~~~
dannyw
It will cost you a little bit more in time and money, but go to your local
(legitimate) farmers market and you’ll have quality meat, fresh veggies and
fruit, and your local microbrewery will serve a cold one with no malt
substitutes for a tiny bit more.

Shopping local is so underrated.

~~~
joe_the_user
Farmer's markets can be a good deal for what they sell but a lot brewpub is
never to going to come close to the price of Budweiser or even more
supermarket label beer. "A tiny bit more" here is $5 or $1.

And fast food is a much cheaper deal than if you cook veggies and organic
burgers yourself - because quality does cost money.

------
Majromax
This article is not as strong as the headline implies. The "models" being
mentioned are supply/demand models of price-setting, not the general
equilibrium models that inform policy.

The Bureau of Labour Statistics is already wise to the fact that products
change over time, and they implement a quality adjustment factor
([https://www.bls.gov/cpi/quality-
adjustment/home.htm](https://www.bls.gov/cpi/quality-adjustment/home.htm)) to
mostly compensate. Something simple like adjusting the quantity of stuff in
the package is so blindingly obvious it should be fully accounted for in
inflation statistics.

Instead, this article (and the research work it's based on) refers to the odd
phenomenon of sticky _market_ prices. In particular (from a bit past the
easily-accessible blurb of the article):

> Firms that sell thousands of different items do not offer them at thousands
> of different prices, but rather slot them into a dozen or two price points.

This is not what you'd expect from a textbook model of economics; there's no
continuous calculation that would explain why a company should prefer to sell
a dozen different shirts for $14.99 despite differences in quality or observed
demand.

The research also suggests the tail wags the dog:

> Retailers, Messrs Aparicio and Rigobon suggest, seem to design products to
> fit their preferred price points. Given a big enough shift in market
> conditions, such as an increase in labour costs, firms often redesign a
> product to fit the price rather than tweak the price.

... which is again counterintuitive given that retailers would ordinarily
_set_ the price.

Ultimately, the macroeconomic point is made best at the conclusion of the
article:

> What’s more, the substitution of quality for price as firms’ main way of
> responding to changing market conditions weakens the case for keeping
> inflation low and stable. Inflation makes relative prices less informative,
> economists reckon, making it harder to decide what to buy and how to spend.
> Rather than clarity, low inflation has brought a different sort of
> confusion: one of shrinking chocolate bars and lost holidays.

... which also makes sense given the research finding being reported on.
Retailers evidently feel they can't adjust price to reflect quality (and have
to go the other way); if inflation were higher but still stable, then everyone
would be forced to make these sorts of adjustments more often.

------
thinkloop
The article seems to have missed the correct conclusion: we calculate
inflation wrong.

If Toblerone gives you less chocolate for the same price, that doesn't mean
some new thing called "shrinkflation" now exists, that means that chocolate
became more expensive. But that new pricing doesn't seem to be properly
hitting the inflation metrics.

~~~
drchewbacca
I agree. I think also there's problems with how GDP is calculated.

If everyone who used spotify was paying 79p per track you would see massive
economic growth in the music sector. However because it's an all inclusive
streaming service not a huge amount more money is moving through it.

However as a consumer I am getting 1000x more music now than when I was 15yrs
old. That doesn't seem to get recorded though.

So much stuff on the internet (like stack overflow or github) has gargantuan
economic value but doesn't figure in GDP stats because it's mostly free.

~~~
thinkloop
> So much stuff on the internet (like stack overflow or github) has gargantuan
> economic value

I'm not so sure about that. Yes they are _conduits_ to massive value, but that
value is coming from us, not them. If they were to close down, equally good
replacements would be (are) available immediately.

~~~
username90
The value is still there though, today I have easier and better access to
information, books, education, music, movies, games etc than the richest man
alive 30 years ago. Back then people paid a lot of money to get information
via physical media like huge encyclopedia sets, what we have today is both
much better and much cheaper for everyone. But of course all of those books
and cassettes were good for GDP while today's free services are not.

------
eecc
Haven’t read the article beyond the free teaser, but I wonder if an
alternative explanation was that in previous decades competition strategies
were strongly about adding to the amount of product: “10% more, for the same
price!”

Now that the market consolidated and the losers have been driven out or bought
out, the winners are quietly taking it back

------
acd
So you measure inflation price per gram model fixed.

Current inflation models are also flawed in other ways as it changes goods
exchange. Also if a measured market good is better price is adjusted. Example
larger tv size.

~~~
nabla9
The shrinkflation problem in bulk retail CPI calculation comes from the way
the the data is collected. They typically use GTIN numbers and those don't
change when the quantity changes. You need to do additional work to correct
for that.

Quality adjustment in CPI calculation is routinely done for many products
using hedonic modeling. It's important in all rapidly advancing product
categories like like TV's as you mention. For a product like a smartphone
price difference between the replacement item and its predecessor is almost
never pure price change. For example screen resolution change in smartphones
induces quality adjustment to the price change.

------
dafty4
At most grocery stores, the price per ounce is quoted beneath the overall item
price. I realize reading glasses are expensive, but can the economists at the
Bank of International Settlements and MIT not simply calculate inflation that
way?

------
unimployed
>The uncertainty principle If it happens on a sufficiently large scale, the
practice of tweaking quality in lieu of price could play havoc with essential
economic data. Statistical agencies do their best to account for changing
product quality, but if adjustments are unexpectedly common or subtle then
muted inflation figures could easily be concealing a more turbulent economic
picture. Central banks watching for big swings in inflation or wage growth as
a sign of trouble could be reacting to figures that bear far less relation to
business conditions than they used to.

>What’s more, the substitution of quality for price as firms’ main way of
responding to changing market conditions weakens the case for keeping
inflation low and stable. Inflation makes relative prices less informative,
economists reckon, making it harder to decide what to buy and how to spend.
Rather than clarity, low inflation has brought a different sort of confusion:
one of shrinking chocolate bars and lost holidays.

What has long been suspected by those outside the field, and rarely
acknowledged by economists and statisticians inside the field. Consumer Price
Index (CPI), a standard methodology of nearly every national bureau of
statistics and economic measurement is susceptible to manipulation and gaming
by producers and retailers because the statistical agencies employ limited
resources to perform quality adjustments to the item price data.

The adjustment methodology is quite limited in what adjustments are made and
the resources dedicated to comparing items and differences—there is no lab
testing being performed and the most extensive research performed on some
items is using product brochure data to make adjustments based on listed
features at face value only (the brochure says this is better or comes with
better features).

Often product data is limited so no adjustments are made, only assumptions
like “we believe this product has the same quality or content” or “we will
impute the missing price or data based on similarly available data or some
kind of modeling abstraction.”

This standard methodology led by the U.S. BLS and other agencies has done a
complete disservice to the reputability of economics as a hard science instead
of a bureaucratic ideology.

~~~
appleiigs
> rarely acknowledged by economists and statisticians inside the field.

This is complete false. If you ever took an Econ 101 course, you'd know the
fallibility of economic stats are covered at length.

~~~
unimployed
Pretty sure you are being sarcastic or you are not all that experienced.

Talk at length with most economic professionals on /r/economics and you will
find the repeatedly stated and unstated views that “the CPI is the most
studied economic measurement in the world” and “you are welcome to perform
your own study covering the inadequacies of the CPI.” I paraphrased slightly
but from memory those quotes are highly accurate, as well as the general
dismissiveness and institutionalism/bias pertaining to official economic data.
Also for a professional economist to question the accuracy of official
economic data is career suicide. Why you rarely see that topic discussed by a
professional economist or in a published study.

~~~
thesagan
I've seen this pattern in academic settings myself.

There's simply a lot of tunnel vision. Although, as a parent comment pointed
out (a bit rudely) there's acknowledgement of various shortcomings of measures
such as CPI, there's also a tendency to assume these models are accurate in
policy-setting institutions.

I'd say they're maybe as accurate as predicting weather in the Great Lakes
Region.

Also: r/economics should not be representative of economists, as a group.
(Although they do parrot a lot of bank and government economist views.) Most
posters there strike me as undergrads, who are mostly clueless to the fuzzy
subtleties of the study (and life in general.)

~~~
VHRanger
Mod of r/economics here.

If you want informed people on economics on reddit, go to r/badeconomics which
is the more tightly knit hangout for professional economists and grad
students.

Otherwise, go to the economics cluster on twitter. r/economics is like r/news
with an econ twist. It's too large to effectively moderate.

~~~
nabla9
r/badeconomics is great place to lurk for a layman who wants to learn.

The problem for layman like me interested in economics is that you have
absorbed so much wrong views and explanations from the news and political
commentary that you must work hard to unlearn them before you can start
learning.

------
aembleton
The ONS who calculate the UKs GDP are aware of this and have an interesting
report on it:
[https://www.ons.gov.uk/economy/inflationandpriceindices/arti...](https://www.ons.gov.uk/economy/inflationandpriceindices/articles/theimpactofshrinkflationoncpihuk/howmanyofourproductsaregettingsmaller)

"In order to accurately measure inflation, we use quality adjustment processes
to account for any changes to a product’s weight, volume or size"

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WalterBright
My father told me about the "nickel bar" which was a popular chocolate bar
that sold for, you guessed it, a nickel. The size of the bar would grow and
shrink as the cost of chocolate varied.

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JulianMorrison
Shrinkflation is fraud by sleight of hand (you didn't read the mass label, did
you?) and it should be outright illegal.

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SubiculumCode
Shrinkflation: Like what happened to this article?

~~~
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