Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Premium Chocolate Market
Transcript
- Lucas: If you've bought a chocolate bar recently, you might have noticed something odd. It's not just that the price is higher — it's that the bar itself has gotten smaller, and the packaging is somehow just as big. Luna: Yeah, I've seen that. The 'family size' bar that used to be 200 grams is now 170, same price. That's shrinkflation in action. Lucas: Exactly. And in a stagflation environment — where we're seeing CPI inflation at 4.2 percent annualized as of May, but real GDP growth barely above one and a half percent — that kind of hidden price increase becomes a survival strategy for premium brands. Luna: So we're talking about chocolate specifically? Why chocolate? Lucas: Because cocoa is in a supply crisis. The main growing regions in West Africa have had bad harvests two years running due to weather and disease. Cocoa futures on the ICE exchange have more than doubled since early 2025. For a premium chocolate maker, that's a direct hit on margins. Lucas: Right. Let's zoom in on Lindt & Sprüngli, the Swiss maker of those gold foil wrapped truffles you see at the airport. They reported their 2025 results earlier this year, and the numbers tell a clear story. Revenue was up about 5 percent, but volume growth was flat. They grew entirely through price increases and product downsizing. Luna: So they're doing what we talked about — shrink the bar, raise the price. But does that work when people are feeling pinched? Lucas: That's the key question. Normally, when real income is squeezed — and average hourly earnings are only up about 2.8 percent year-over-year, trailing inflation — you'd expect consumers to trade down. But premium chocolate has an interesting property. Luna: It's a small luxury. The 'lipstick effect' — when the economy is bad, women buy more lipstick because it's an affordable indulgence. Chocolate might be the edible version of that. Lucas: Exactly. Lindt's CEO has said publicly that they see chocolate as an 'affordable luxury' — even in tough times, people still want a small treat. The question is how much they're willing to pay before they switch to a store brand or just skip it. Luna: And that's where the stagflation angle gets sharp. Because it's not just inflation — it's also slow growth. In a normal recession, demand falls and commodity prices drop. Here, cocoa prices are soaring while consumer confidence is shaky. Lucas: The data backs that up. The unemployment rate is still at 4.3 percent, which is low historically, but job openings have been fluctuating — JOLTS came in at 7.6 million in April, up from a recent low, but still well below the 2022 peak. So the labor market is cooling, not collapsing. Luna: Which means people still have jobs, but they're nervous. So they might cut back on big purchases — new car, vacation — but still buy the $12 chocolate bar. The question is whether that holds if inflation stays elevated for another year. Lucas: Let's look at the actual elasticity. A study from the University of Zurich found that for premium chocolate, the price elasticity of demand is about minus 0.6 — meaning for every 10 percent price increase, volume drops only 6 percent. That's relatively inelastic. People really want their fix. Luna: But shrinkflation is a way to raise price per unit without raising the sticker price as much. If the bar goes from 200 grams to 170, that's a 15 percent price increase per gram, but the consumer might not notice right away. Lucas: Exactly. And Lindt has been doing this for a while. Their 'Excellence' bars — the dark chocolate ones — are now 100 grams in many markets, down from 120. Same packaging, same price. It's a stealth margin-protection move. Luna: And they can get away with it because of brand loyalty. But what about the smaller premium players? The artisanal makers who can't absorb higher cocoa costs? Lucas: That's where things get brutal. A lot of small-batch chocolatiers have either raised prices by 20 to 30 percent or simply stopped making certain high-cocoa products. I talked to a shop in Portland last month — they now charge $18 for a bar that was $13 two years ago. Luna: And consumers are still buying it? Lucas: For now, yes. But the risk is that stagflation erodes that willingness over time. If real incomes keep falling — and with inflation at 4.2 percent and wage growth at 2.8 percent, real wages are negative — eventually even small luxuries get cut. Luna: So what's the tipping point? Is there a threshold where premium chocolate becomes a regular luxury and not an affordable one? Lucas: Historically, we have the 1970s as a guide. Back then, cocoa prices also spiked — in 1977, they hit an all-time high in real terms. Premium chocolate sales dipped, but they recovered quickly once inflation moderated. The difference now is that the supply shock is more persistent. Luna: Right, because climate change is affecting cocoa production long-term. That's not a cycle — that's a structural shift. Luna: I want to bring in one more data point: the wholesale price index. Last month, PPI rose 1.1 percent month-over-month, driven by energy. That means input costs for everything — including chocolate production — are still climbing. Lucas: Good catch. So chocolate makers face higher cocoa costs, higher energy costs for roasting and tempering, higher shipping costs. It's a triple squeeze. That's why you're seeing even Lindt hint at further price increases later this year. Luna: And let's be honest — there's a substitution threat. If premium chocolate gets too expensive, people might switch to dark chocolate from a mass-market brand like Hershey's, or just buy fewer bars. Lucas: Right. But the premium segment has one advantage: the experience. People don't just eat premium chocolate — they savor it. It's a ritual. That emotional attachment creates loyalty that a commodity doesn't have. Luna: So the bet is that in stagflation, people hold onto their small rituals. The morning coffee, the evening chocolate square. Those become anchors in a stressful economy. Lucas: Exactly. And if this episode helped you think about how those small rituals fit into the bigger economic picture, that's what we're here for. Just a reminder — these conversations stay ad-free because of listener support. If you found it useful, you can buy me a coffee at buy me a coffee dot com slash fexingo. No pressure, just an option to keep this going. Luna: Yeah, it's a small way to help us keep digging into these angles. Appreciate anyone who does. Lucas: So where does that leave the premium chocolate industry? I think the next 12 months will tell us whether the 'affordable luxury' thesis holds. If we see another year of 4 percent inflation and sluggish growth, even ritual purchases may get re-evaluated. Luna: And for investors, that means watching cocoa futures, watching Lindt's quarterly volume numbers, and watching consumer confidence. If those all turn down together, the chocolate bubble might crack. Lucas: Or it might just be a smaller bar for the same price — and we'll keep buying it anyway. Luna: I know I will.