Shrinkflation and stagflation: What are they and how could they affect your finances

Food prices have risen by almost 20% over the past year as the cost of living crisis continues to bite.

According to the Office for National Statistics (ONS) last month, food and non-alcoholic beverage prices continued to rise in April and contributed to high annual inflation, however, the annual inflation rate of food and non-alcoholic beverages eased, from 19.2% in the year to March 2023, to 19.1% in the year to April 2023.

On a monthly basis, consumer prices rose by 1.2%, above a consensus estimate of 0.8%.

Amid intense wage pressures more people are now focused on buying essential items, with many becoming increasingly concerned that products are shrinking.

New research from Barclays (BARC.L) revealed that two-thirds of UK shoppers claimed that manufacturers are reducing the size of their products, such as chocolate bars and crisps, despite the price remaining the same or increasing, forcing a shift to buying in bulk.

Read more: UK inflation falls to 8.7% in April but high food prices persist

What is shrinkflation?

Shrinkflation is the economic term for manufacturers reducing the size, quantity or weight of their products without decreasing prices.

Made up of two separate words: shrink and inflation, it is also known as package downsizing, where consumers get less for the same price.

The term has been attributed to American economist Pippa Malmgren, though the same term had been used earlier by historian Brian Domitrovic to refer to an economy shrinking while also suffering high inflation.

Shrinkflation allows companies to boost their operating margin and profitability by simultaneously reducing costs and maintaining sales volume. Business may also resort to shrinkflation to maintain market share.

Although changes are minimal and limited to a small range of products, it is often used as an alternative to raising prices in line with inflation.

Watch: What is a recession and how do we spot one?

Earlier this year Mars Inc reduced the weight of their Whiskas cat food by 15%, reducing the weight of each pouch from 100g to 85g, while Unilever (ULVR.L) reduced the size of its Ben & Jerry's ice-cream tubs in Europe from 500ml to 465ml.

"Consumers are still paying close attention to their everyday spending, and we are seeing growing concerns around shrinkflation in the weekly shop," Esme Harwood, a director at Barclays, said.

"Many are having to forgo discretionary purchases to offset rising food prices, with clothing and restaurants most impacted."

To help avoid the impact of shrinkflation consumers can purchase different brands to their normal shopping habits, including buying generic value goods instead of well-known brands. Buying products in bulk instead of smaller packages can also help save money.

Read more: Revealed: UK's cheapest supermarkets

What is stagflation?

Stagflation is a play on words, combining stagnation and inflation and was made popular during the recession in the 1960s and 70s.

The term was first coined by former chancellor of the exchequer Iain Macleod during a speech on the UK economy in the House of Commons in November 1965.

"We now have the worst of both worlds – not just inflation on the one side or stagnation on the other, but both of them together. We have a sort of stagflation situation," he said.

It is the simultaneous appearance in an economy of slow growth, high unemployment, and rising prices.

The periods most associated with stagflation include the oil crisis in 1973-1975 and the decline of traditional British industries that lasted into the 80s. It was this lethal combination of slow growth and high inflation that provided former prime minister Margaret Thatcher the opportunity to seize the top role in politics.

The root cause of stagflation is often argued by economists, however, it generally happens when a supply shock occurs. This is an unexpected event, such as a disruption in the oil supply.

Another example of this was during the COVID-19 pandemic when there was a disruption of the flow of semiconductors – this slowed the production of many electronic devices from laptops and smartphones to cars and home appliances.

Such a shock can affect all of the factors that make up stagflation: inflation, employment, and economic growth.

It comes as prime minister Rishi Sunak was warned last month that the UK economy could be in recession in 2024 as high inflation pushes interest rates to more than 5% before the next general election.

Financial markets are betting that the Bank of England (BoE) will hike its key base rate to 5.5% from the current level of 4.5% before the end of the year.

Read more: UK households paying an extra £833 on groceries as food inflation remains high

UK inflation has remained stubbornly high even as the economy has defied expectations for a recession so far, prompting Threadneedle Street to hike interest rates for the 12th consecutive time at its last meeting.

Rocio Concha, Which? director of Policy and Advocacy, said: "With food prices still very high, millions of desperate parents and people on low incomes have no choice but to resort to more extreme measures such as skipping meals in order to provide for their loved ones.

"Supermarkets should make it easier for people by urgently committing to stocking essential budget ranges in all their stores, particularly in areas where people are most in need. Clearer pricing is also vital in enabling shoppers to compare prices and find the best value products, so it's good to see the government committing to reviewing pricing rules, but this must be undertaken quickly."

Watch: How does inflation affect interest rates?

Download the Yahoo Finance app, available for Apple and Android .