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How Inflation and Shrinkflation Affect Our Local Economies

how-inflation-and-shrinkflation-affect-our-local-economies

Inflation Rates

In May 2020, we saw our lowest inflation rate of 0.3 percent. Fast forward two years to June 2022, when we saw our highest inflation rate of 9.1 percent. As the months go on, the inflation rate drops slowly while remaining at a high rate. How are local consumers and businesses coping with high demand and product shortages?

To understand the recent changes in relationships between businesses and consumers, you need to understand the following:

  • What an inflationary economy is
  • What causes an inflationary economy
  • The concept of shrinkflation
  • How consumers and businesses are affected by an inflationary economy
  • What’s in store for our local economy in the future
how-inflation-and-shrinkflation-affect-our-local-economies

What is an Inflationary Economy?

An inflationary economy is an economic phenomenon in which the general level of prices of goods and services increases over time. The price of goods and services goes up, which makes it difficult for consumers to afford the things they need.

Inflation is measured by comparing the change in the price level over time and is usually expressed as a percentage rate. The inflation rate or consumer price index is the percentage change in a price index from one period to another.

What causes an inflationary economy?

What causes an inflationary economy?

An increase in the money supply causes an inflationary economy. The increase in money supply in the economy leads to increased demand for goods and services. Because people have money to spend, there is an increase in demand.

The inflationary economy can also be caused by a decrease in the supply of goods and services, but the demand remains the same. In recent times, product shortages have occurred in various industries and have caused a decrease in supplies that are in high demand.

What Is Shrinkflation?

Some may refer to "shrinkflation" as an economy contracting while price levels rise. However, for the purposes of this article, shrinkflation will be defined as when the volume or size of a product is lowered, but the price of the product remains the same.

how-inflation-and-shrinkflation-affect-our-local-economies

This happens when companies want to increase profit margins, but raising prices would be too obvious. So they shrink the amount of product and charge the same price, believing that no one will notice.

We have seen this with ice cream over the years. Remember the days when the half-gallon cartons were actually half-gallons? The volume of ice cream has shrunk from a half-gallon or 64 oz to 48 oz. Two cups of ice cream have disappeared from the half-gallon carton. And when one company decides to do this and is successful, the other competitors tend to follow this trend.

In the case of an inflationary economy, businesses also have to pay high prices to stock their inventory. A method they use to save on those costs is to shrink the number of products or services they offer but not lower the prices of those offerings.

For example, if you get takeout at your local restaurant and order dipping sauces, you might find the dipping sauce containers have shrunk, causing you to purchase more dipping sauce containers.

Effects of Inflation on Our Local Economy

Because inflation rates rose so fast, this caused energy prices to rise 60 percent in the last year and home food prices to rise 12 percent. Because of high home food prices, residents may turn to less expensive, unhealthy alternatives, such as fast food. Rent costs, housing costs, and restaurant meals are also rising.

In the video below, find out what the Wall Street Journal thinks caused this recent inflation and why it’s lasted so long.

Committees within the Federal Reserve and central banks control the interest rates to level the economy. Even though raising the rates, in the long run, can deflate the economy to normal levels, this can have a negative impact on some consumers and businesses.

Those who hold credit card debt, car loans, and student loans with variable interest rates attached to the borrowed money will struggle to meet those payments. Raising rates will also make it more expensive for businesses to borrow to keep their businesses thriving. However, to bring down inflation rates, slowing economic growth is necessary.

Predictions For the Future of Local Economies

The Federal Reserve and central banks will raise interest rates to deflate the economy when inflation rears its ugly head. Raising the interest rates is supposed to remove the money circulating in the economy. Raising the interest rates will encourage consumers to save, in a high-interest-bearing account, while not incentivizing consumers to borrow and buy.

The Federal Open Market Committee (FOMC) recently raised rates again to a range of 4.25% to 4.5%, which means the inflation rate is dropping very slowly. According to the inflation rate graph, the inflation rate is about 7.1 percent.

However, the goal is to get to a 2 percent inflation rate. So FOMC needed to raise interest rates again to reach that goal. Unfortunately, it can take months of observing the economy and raising rates for inflation to drop to an acceptable level, so this can’t be fixed in the short term.

The question on everyone’s mind is: when will this inflation finally end?

Some experts fear that if people stop spending totally, a recession can occur. The video below explains why.

Be Prepared

As the saying goes, prepare for the worst and hope for the best. If a recession is on the horizon, here are some tips to prepare should it occur:

  • Cut unnecessary expenses
  • Start building an emergency fund that can cover three to six months' worth of expenses
  • Make it a priority to pay off high-interest debt
  • Update your resume

This content reflects the personal opinions of the author. It is accurate and true to the best of the author’s knowledge and should not be substituted for impartial fact or advice in legal, political, or personal matters.