Shrinkflation

Red Baron remembers the time when the neologism stagflation, the combination of long-term inflation and a stagnant economy, was coined in the 1960s. Economists widely used it in the 1970s when the oil crisis caused this situation in many countries worldwide.

Now it sounds worse when economists talk about shrinkflation.

However, for Red Baron, it is not only about packages containing less product to avoid scaring off consumers. Shrinkflation also means a shrinking economy still suffering from the coronavirus pandemic, currently hit by the war in Ukraine and compounded by the climate crisis. 

Raw materials are more expensive, and production is frequently disrupted by broken supply chains. Altogether, industry produces less at a higher price. Shortages, e.g., of energy, and higher production costs drive inflation. It is as high as 7.9% in Germany, with no end.

Many are unsettled and abstain from consuming non-essential agricultural products like strawberries, cherries, and asparagus. They eschew fancy restaurants and no longer go to concerts, etc., because they want to be sure they can settle their energy bills at the end of the month. Consumption is shrinking while inflation is galloping.

Up to now, Red Baron has felt inflation only marginally.

- My beloved Bengele bread increased from euro 3,20 to 3,30.

- I consume about 2300 kWh of electricity per year, and my provider told me that my annual bill will only be higher by euro 4,52 in the coming year.

- My car is mainly immobile in the underground car park of my apartment. So gas prices are not relevant for Red Baron.

- For public transport, I presently pay only 9 euros per month until September; my regular monthly Regio ticket that I use a lot will again cost me 54 euros or a little bit more.

I fear the worst is still to come. Today, an interest rate war started. After the Fed raised rates by 75 points to fight inflation in the States, the Swiss National Bank followed today, raising its interest rate by 50 points, while the European Central Bank did not move.

As a consequence, the euro yesterday exchanged at 1.043 CHF. It can now be bought for only 1.014 CHF. This means more Swiss tourists in town, who will, however, only partly offset the buying reluctance of local consumers.
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