As central banks struggle to restrain inflation, we examine some of the lesser known 'flations entering public discourse.
Price hikes are everywhere – from petrol stations and supermarkets to rental properties and flights. While inflation may be getting its fair share of the top headlines as a result, there are a number of other ‘flations making their way into conversations.
We’re talking the lesser-known cousins of inflation: shrinkflation, stagflation and greedflation. Curious to know how they relate to each other and what they mean? Let’s dive in.
Of course, we have to kick off with the term we hear and read about most often, inflation. At its core, it’s the general increase in the price of goods and services over time, which reduces our purchasing power. This means that £100 today may buy you a much lighter load of everyday items than it did even a month ago.
“We have seen inflation exceed most economists’ predictions throughout 2022, with the UK’s annual inflation rate hitting 10.1 percent in August,” says Frederique Carrier, managing director, head of investment strategy at RBC Wealth Management in the British Isles and Asia. “Unfortunately, we’re unlikely to see this figure drop any time soon. The Bank of England expects inflation to rise to 13 percent and remain above 10 percent for most of next year.”
Inflation affects all aspects of the economy – from consumer spending and business investments, to government policies and interest rates.
“Traditionally, a moderate level of inflation (around two percent) is considered a positive signal. This is because it’s associated with economic growth,” says Carrier. Higher levels of inflation are often perceived as a negative signal – suggesting the economy may be overheated. This can lead to an economic downturn, with some businesses suffering more than others.
Hyperinflation involves fast and excessive price surges within an economy, typically defined as when the rate of inflation increases at more than 50 per cent per month, according to the World Economic Forum. While the term hyperinflation has been making its way into headlines, it’s rare in developed economies and has been mostly limited to developing nations.
Some consider ‘tulipmania’ to be one of the earliest examples of hyperinflation, while a more modern-day example is Zimbabwe, where after a number of economic shocks the country’s monthly inflation rate for November 2008 reached 79.6 billion percent, according to the Cato Institute. Venezuela broke a four-year stretch of hyperinflation in 2021, according to Bloomberg, after marking a full year with monthly inflation below 50 percent (the country ended 2021 with inflation at 686.4 percent, the news organisation reported).
Stagflation is something of a perfect storm in economic terms, and occurs during a period that sees an unfortunate mix of slow growth within an economy, along with high levels of inflation and unemployment. Usually, these three economic forces don’t happen together since unemployment and inflation rates typically move in opposite directions. Still, it isn’t unheard of. In the 1970s, stagflation occurred during an oil crisis that saw oil prices in countries like the UK and U.S. climb sharply while supplies dwindled thanks in part to a supply embargo.
You’re likely not imagining it – those crisps you regularly buy still cost the same but the bag seems a little lighter now. And your favourite cereal brand may now come in a smaller box, but the cost has remained steady. Welcome to shrinkflation.
Shrinkflation is commonly referred to as a packaging downsize. Many manufacturers are quietly reducing package sizes without lowering prices as a way to deal with the impact of rising inflation. For the same price, you may see 95 sheets of paper towel now instead of 110 just a few months ago. It’s a subtle and stealthy way for firms to cope as surging material costs erode their profit margins.
What to watch for? Unless you compare older packaging to new packaging on a regular basis, shrinkflation can be hard to detect. Keeping an eye on the number of servings in a box and product weights can help you start to gauge if you’re getting as much as you used to.
Greedflation, though not an academically accepted term, has been taking a bit of the ‘flation spotlight lately. In a nutshell, it’s defined as price increases driven by corporate greed (e.g. price gouging). It’s the idea that a monopoly in the market can fuel inflation by taking advantage of its position to artificially hike prices as a means of increasing profits. The term made headlines recently in the U.S. after some U.S. lawmakers claimed inflation has been exacerbated by corporate greed.
With uncertainty defining the economy and more interest rate hikes expected in 2022 and beyond, many of these ‘flations will likely continue to make their way into everyday headlines.
A version of this article was first published on RBC Direct Investing’s Inspired Investor.
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