We all have been hearing and reading a lot about inflation. Inflation basically means the prices of anything and everything is rising, making each thing expensive and our lives difficult. Inflation is at its peak now, and Central Bank of each country is trying its best to keep inflation in check. Recently, Fed had revised the intrest rates upwards with every country following it’s footsteps.
But how many of us know about Shadow Inflation?
To start, its relatively a new concept but not a new practice thats has been taking place. Let me share a personal experience to understand the concept better. We always use a particular brand of hand soap in our house, we have been using it for quite some years now. However over the years, the price of the product has remained same but the size of the soap has reduced. Another example with which we all can relate is potato chips. Over the years, the price of one packet of chips has remained the same however the quantity of the chips has reduced. You may not even realise how common this practice is around us. Lets say you check in to a hotel for the same tariff as before, however fewer services or less buffet breakfast options are available. These are all examples of Shadow Inflation.
These companies have been reducing the quality of service, quantity or size of the product in order to factor in the inflation instead of raising the price of the product/ service. The reason why it is called Shadow Inflation is because it is difficult to capture in the Consumer Price Index (CPI). These small changes are hard to notice at first, and so it doesn’t really have an impact consumer behaviour. Here, the company is not only factoring in the consequences of inflation but also not risking the consumer psyche. Another benefit the companies may enjoy in this practice, is that by maintaining the same price of the product or service, it is not compromising on its target group of customers. The ideology is that consumers are usually fixated on the price of the product and the size of the package, and as long as it looks the same, they do not verify the details about the quantity and other printed details. As misleading as it is, every party involved is happy since it’s still in the budget of the consumer and the company is not losing on its customer base and target group.
The Consumer Price Index (CPI) is a measure of the overall change in the prices a Consumer has to pay, based on a representative basket of good and services. It is a very important measure, followed closely by policymakers, financial markets, business, companies, and consumers.
Note as i have mentioned earlier, Shadow inflation is hard to capture in the CPI. This means that CPI, which we thought gave us information of Inflation or Deflation, is actually not showing us the real picture.
It therefore will not be wrong to say that Inflation in reality is higher than what is being projected, and the end users are the one suffering the most because of it.