Many of us are still scratching our heads when it comes to the Fed and their use of the CPI to measure inflation. Goods costing more is inevitable facet of a 2% "healthy inflation." Thanks Nixon. But what if it exceeds expectations? This would be reflected in CPI data and the Fed would act accordingly by increasing interest rates.

But what if prices stay the same... but the number of, let's say corn flakes per box or trash bags in a box, is reduced by 10%? How does this get factored into the CPI? It doesn't.

This phenomenon is known as "Shrink-flation" and has gathered new prevalence in the news cycle. While the concept is easy enough to understand: prices don't change, but weight or amount is reduced.

This is one way supplies and producers factor in the increased cost of goods without passing it on to the consumer via sticker price. While it's mostly prevalent where there is lots of individual units (pastic bags, cereals, chips, towels, tissues, etc) it's less obvious in other applications.

Here are some other ways that shrink-flation makes it into consumer goods and doesn't show up in the official CPI numbers:

  • Reducing the quality of ingredients (e.i. HFCS instead of cane sugar)
  • Restaurants imposing minimums (e.i. $100 minimum order per person) even though menu prices may not change
  • No refunds on canceling reservations
  • New cars now sell for MSRP due to shortage vs previously where you could get a new car well below MSRP (e.i. prices haven't "gone up" because the sticker is still the same)
  • Cheaper materials (e.i. plastic instead of steel, particle board instead of real wood)

However, there is also a more insidious shrink-flation in the service industry that involves your own time.

  • Hiring back less staff.
  • More time spent waiting for a person to talk to on the phone
  • Less staff at the airport, leading to flight delays.

Assembly required. How much time does it take to assemble your own piece of flat-pack furniture with the pack of screws they send with unintelligible instructions? How much is your time worth? Regardless, it's free to them and they save money.