What is Shrinkflation? Is Shrinkflation illegal? | INDmoney Classroom #14

During inflation, the raw materials of several companies rise. As a result, firms are forced to increase the cost of their products in order to maintain the same profit margin. But instead of increasing the prices, several companies resort to reducing the quantity offered by keeping the prices constant. This is known as shrinkflation. 

Shrinkflation as such is not considered illegal as long as the companies show the correct quantity that is being offered on the label. However, several experts have a slightly different opinion as they feel that the reduction in the quantity offered must be made more visible to consumers so that they are aware of the actual quantity that is on offer.

The British Economist Pippa Malmgren is quoted as the one who coined the term in the year 2009. 

There are two main reasons why companies resort to shrinkflation to maintain profit margins:

1. A rise in the cost of raw materials: When raw material prices increase, companies are compelled to reduce the quantity offered in order to maintain the same profit margin. This happens especially in the consumer goods sector where the switching cost to consumers is less. 
2. High Competition: When there are several players in the market that offer similar products, there is an ample chance for a price war in order to capture greater market share. In such instances, companies resort to shrinkflation as it is tough for them to increase the prices of their products.