Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Shrinkflation Is Quietly Reshaping Your Grocery Bill
Transcript
- Lucas: So you're at the grocery store, you grab your usual box of cereal, and something feels off. The box looks the same, but it's lighter. You flip it over and — 18 ounces instead of 20. And the price? Exactly what it was last month. Luna: That's shrinkflation. And it's everywhere right now. I've noticed it with coffee, crackers, even toilet paper. Lucas: Right. And here's the thing: the government's inflation numbers — like the CPI, which hit 334.0 in May — they track prices, not package sizes. So if a box of cereal costs the same, the CPI says no inflation in that category. But you're getting less product for the same money. Luna: Which means the real inflation you feel at the register is higher than what the official numbers show. And if this kind of thing matters to you — if walking through the economy with us has made something click — consider supporting the show. It's a couple of dollars a month that genuinely keeps these going. Buy me a coffee dot com slash fexingo. Lucas: Yeah, and every bit helps us stay ad-free and independent. So back to shrinkflation — let's talk about why companies are doing it now more than ever. Lucas: The simplest reason: consumers are price-sensitive. If a company raises the price of a cereal box from $4.99 to $5.49, you notice. You might switch brands. But if they keep it at $4.99 and shave off two ounces, most people don't notice. Luna: Especially if they don't check the net weight. And companies count on that. It's a way to pass along cost increases without triggering sticker shock. Lucas: Exactly. And those cost increases are real — labor, ingredients, transportation. The producer price index has been climbing. So companies are squeezed. Shrinkflation is one of their tools. Luna: But doesn't the CPI adjust for this somehow? I thought they tracked unit prices. Lucas: They try. The Bureau of Labor Statistics does adjust for quality and quantity changes — it's called hedonic quality adjustment. But it's imperfect. For example, if a cereal box goes from 20 to 18 ounces, the CPI formula should catch that and treat it as a price increase of about 11 percent. But in practice, it takes time, and not all items get adjusted promptly. Luna: So in theory it's accounted for, but in reality there's a lag. And meanwhile, you're just eating less cereal for the same price. Lucas: Right. And the impact adds up. A study from the House Oversight Committee a few years ago found that from 2019 to 2023, nearly 10 percent of products in some categories shrank. That's a lot of hidden inflation. Luna: And it disproportionately affects lower-income households, because they spend a larger share of their income on groceries. So shrinkflation is regressive in that sense. Lucas: That's a great point. And it's one reason the Fed's focus on the CPI might understate the true cost of living increases for many families. The Fed's target is 2 percent inflation as measured by the PCE price index — which also has its own quirks. But neither index fully captures shrinkflation in real time. Luna: So what can people do? Besides feeling frustrated. Lucas: A few things. First, check the unit price — the price per ounce or per pound. It's usually in tiny print on the shelf tag. That's your best friend. Second, buy in bulk when it makes sense. Sometimes the larger package has a better per-unit price, but not always. Luna: And pay attention to the net weight on the package. If it changes, you know. Lucas: Exactly. There are also apps and websites that track shrinkflation — some consumer groups list products that have shrunk. But honestly, the biggest thing is awareness. Once you start looking, you see it everywhere. Luna: Let's give a concrete example. Last week I bought a bag of coffee — same brand, same price. But I happened to notice the bag said 12 ounces. I swear it used to be 14. I checked online, and sure enough, it had been downsized six months ago. Lucas: That's a 14 percent reduction. If the price stayed the same, that's effectively a 14 percent price increase. The CPI might not catch that for months, if at all. And meanwhile, you're going through coffee faster because you use the same scoop. Luna: Exactly. And it's not just groceries — it's also paper towels, laundry detergent, even some over-the-counter medications. The packages get smaller, the number of sheets per roll drops, the concentration changes. Lucas: And there's a psychological angle too. Companies know that consumers have a 'reference price' in their head. For a can of soda, you expect around a dollar. If the can shrinks from 12 ounces to 11.5, you might not notice because the price is still a dollar. But over the course of a year, you're buying more cans to get the same volume. Luna: So it's a stealth tax on the inattentive. And I think the inflation data we see — like the latest CPI at 334.0 — masks a lot of this. The headline number is 3.3 percent year-over-year or something? But if you factor in shrinkflation, it might be closer to 4. Lucas: That's a reasonable estimate. Some economists have tried to quantify it. A working paper from the National Bureau of Economic Research suggested that shrinkflation could add 0.2 to 0.5 percentage points to measured inflation, depending on the category. That's not trivial when the Fed is trying to get from 3.3 percent down to 2. Luna: And the Fed's new chair, Kevin Warsh, just had his first meeting last week. The statement didn't mention shrinkflation explicitly, but it did note that 'some measures of inflation remain elevated.' I wonder if this is part of what they're seeing. Lucas: Probably. The Fed looks at a range of indicators, including the PCE and the CPI. But they also look at anecdotal reports from the Beige Book. And in recent Beige Books, businesses have mentioned raising prices or reducing package sizes. So it's on their radar, even if it's not a headline. Luna: So what's the long-term solution? Should the government change how it tracks inflation to catch shrinkflation more quickly? Lucas: There have been proposals. Some economists suggest that the BLS should use scanner data from retailers — actual point of sale data — which would capture both price and quantity changes in real time. But that raises privacy and cost concerns. Currently, the BLS sends field agents to stores to manually record prices, which is slow. Luna: And even with scanner data, you'd need to track package sizes. That's a lot of SKUs. Lucas: Right. But some countries, like the UK, have started using web scraping to track prices and package sizes. It's not perfect, but it's faster. In the US, there's a pilot program at the BLS to use online prices, but it's not fully rolled out. Luna: So for now, the consumer is left to fend for themselves. Check unit prices, read labels, and maybe buy the store brand — those tend to be more stable in size because they're directly produced by the retailer. Lucas: Good advice. And keep an eye on the unit price trend. If your favorite cereal's per-ounce price goes up, even if the box price doesn't, that's shrinkflation in action. Luna: Alright, so today we learned: the CPI doesn't catch everything, and the cereal box is getting smaller. I'm going to start weighing my coffee bags. Lucas: And I'll be checking the toilet paper sheet count. Next time, we'll look at another hidden side of inflation — maybe how service fees are popping up everywhere. Until then, keep your eyes on those net weights.