The Approaching Shrinkflation Pandemic

Global consumers may shortly experience a pandemic of shrinkflation caused by viral inflation that has rapidly spread across national boundaries. As was the case during the coronavirus pandemic, the poorest and most vulnerable countries will suffer the most as food and energy inflation increases cases of starvation and leads to political and social unrest. After underestimating the impact of this virus for many quarters, central banks of countries, the authorities responsible for the financial health of economies, have launched vaccines, in the form of monetary tightening. These measures are expected to reduce the percentage of their population that interacts with viral inflation affected goods and services and minimize further transmission, referred to as ‘second-round effects’ among doctors of economics. Central banks hope that their temporary measures will buy time till the sources of the viral inflation are identified and neutralized.

Shrinkflation & Skimpflation Pandemics

Shrinkflation is a condition where reputable manufacturers of high-quality consumer goods, that have been affected by viral inflation, shrink the size or volume of a product without altering its sale price. Generally, this action is performed in stealth mode so that consumers do not find out. Less reputable manufactures manage viral inflation with skimpflation, where they use inferior inputs to reduce production cost, without altering the volume or sale price. Both the above protect margins for manufacturers while reducing value for consumers.

India’s Repo Rate will be 6.35% by December 2022

India’s central bank, the Reserve Bank of India (RBI), has already taken swift and decisive monetary tightening actions to control the spread of the shrinkflation pandemic. We feel that, by end-December 2022, RBI will have raised its benchmark repo rate to 6.35%, an increase of 95 basis points from the current level. RBI’s aim from raising the interest cost of borrowing money in Indian rupees will be to partially destroy debt-sensitive demand for the non-food and non-fuel components of India’s Consumer Price Index (CPI) that accounts for 47.30% weight of the index. Its hope will be that falling demand will translate into lower price increases for these items so that the overall CPI basket costs less than it would have at full demand.

Energy Prices will Stay Elevated

Indian and global CPI inflation will probably persist throughout 2022, driven by high prices of global energy. The trend can be broken only when energy prices stop rising since they directly affect all actions from the farm or factory till the consumer. The world’s energy demand has increased beyond pre-coronavirus pandemic levels, global oil inventories are at record lows and there is practically no spare production capacity available with oil exporters. Recessionary trends in certain advanced economies will reduce the pace but not the direction of price changes.

Indian GDP has Recovered – Not Grown

Contrary to popular opinion, the Indian economy is not racing ahead. Real GDP in the 12-months till December 2021 only reached the pre-coronavirus-pandemic level of December 2019. India’s seemingly high 8.68% real GDP growth for 2021-22 was from a pandemic level in 2020-21 when real GDP had fallen 6.60% from the year earlier. RBI’s 2022-23 estimate of 16.20% Q1 real GDP growth is off a very low base and is followed by lower quarterly growth estimates, leading to 7.25% real growth for the full year - just 8.87% higher than that of 2019-20, equivalent to just 2.87% annual real GDP growth over three years. During this period, Indian industry has continued to invest in productive capacity and the labour pool has grown larger. Once the negative effects of viral inflation have subsided, we estimate that India’s real GDP has the capacity to grow at 8.30% annually over the next decade, with moderate inflation.

By Gautam Chand, 27 August 2022