Shrinkflation



Economics is full of fun terms with dire implications. Shrinkflation is the new popular term for what we are experiencing today.

Free market economists have been warning for the past year, or longer, that the actions taken by the Federal Reserve, coupled with the rampant spending over the past two decades, will only result in the incremental destruction of the value of the dollar. The Fed's actions have been the most concerning as of late. When we look at the number of dollars in circulation (M1 Money Stock) we can see that nearly 80% of all dollars in existence were created in the past year. (1) That means more dollars competing for too few goods and services. Furthermore, we are on track to pass way beyond the $3.1 Trillion ($3,100,000,000,000) deficit of 2020, having already reached the $2 Trillion ($2,000,000,000,000) mark in April. (2) So, why has inflation not kicked in high gear yet, if there are so many dollars competing for so few goods and services?


By all means, inflation is coming. There are several reason why it is lagging, however it is on the horizon. If you would like to see a breakdown of where prices are headed, you can read "Why The Fed Is Wrong About The Coming Inflation" by Bill Conerly.


But in our current perspective, we have seen runs on goods, decreased production, and economic impact payments combine to create our current plague: Shrinkflation. I have heard many predict that, while the 1920's was an era of extravagance, the 2020's will be an era of frugality. Americans have learned to pay off credit cards and save for the possibility of losing your job at the hands of government regulators. Businesses are also changing their habits to save costs without drastically increasing prices.


Contrary to popular belief, in competitive markets, individual businesses cannot raise their prices. If Brawny raises its prices, Viva will keep its prices low and outsell the competitor. It is this balance that allows American consumers to enjoy low prices for goods and services and forces businesses to either innovate or fail. You may not have noticed a drastic increase in your grocery bill, but this is by design. Rather than raise prices (the main concern of consumers), businesses are shrinking product sizes. So your role of 175 paper towels that you bought for $2.50 may now be a role of 150 for $2.50. The price appears to be the same, but the size decrease means there was a 14% increase in the real price.


Shrinkflation seems to be what the market has decided will be the temporary result of the rapid rise in production costs. I encourage you to read Brad Polumbo's recent article, "‘Shrinkflation’: The Latest Consequence of Reckless Federal Spending, Explained" at FEE.org to learn more.

 
  1. "M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts)." M1 Supply Feb 10, 2020: $3.84 Trillion - May 3, 2021: $19.1 Trillion (FRED)

  2. Bipartisan Policy Center

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