As per the meaning of the Value deflation, the providers deliver smaller portions of their products, or even reduce the quantity by keeping the same price tag. This helps them to maintain the same sticker price, without losing consumers who look for affordable options.
Companies may apply this strategy to raise their prices stealthily in the face of increasing prices and when customers are becoming more budget-conscious, especially in times of crises like a pandemic outbreak. So, rather than raising their sale prices, companies reduce the value they used to offer at that price sticker.
If seen from the perspective of the overall national or global Economy, then this value deflation is actually a kind of price Inflation if the value consumed is lower than before, at the same price. However, the practice of value deflation can result in an understatement of the inflation rate. Besides, the cost of living is not taken into consideration while calculating the price of indexes.
Most businesses opt for value deflation methods to meet the rising operational costs; however, they don’t want to pass on the price increments to the customers since they are mostly price-conscious.
Therefore, businesses try to provide less value in terms of quantity, or sometimes even quality, while keeping the price tags the same. This practice is most commonly seen in the food and beverage Industry, wherein various food chains, bars, cafes, etc., reduce the product quantity they used to offer before without increasing the prices.
Besides reducing product sizes, businesses can also reduce the quantity of the Raw Materials used while Manufacturing a product. Alternatively, they can also replace the active ingredients with substitute ingredients having a lower quality.
Hence, it helps to boost their profit margins stealthily while also retaining the company’s Market share. Moreover, small reductions in product quantity often go unnoticed by most consumers, as long as the old price is maintained.
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The major causes of value deflection include -
Increasing Cost of Inputs: Increase in production costs, along with labor costs, raw material costs, and energy costs, compel manufacturers and businesses to reduce their product values.
Reduced Purchasing Power of Large Retailers: In the retail industry, there is high competition, and retailers work hard to strive in the market by keeping their prices low as far as possible.
Some of the possible impacts of value deflation are -
If a company in the food industry, for example, decides to replace some of its high-value ingredients with low-quality ones, it may be harmful to the consumers. However, sometimes reducing some ingredients may also have a positive impact on one’s health.
For instance, if a confectionery company reduces their sugar content in their products like cakes, cookies, chocolates, candies, etc., it may reduce obesity and improve other health conditions associated with high sugar levels.
Although many consumers won’t notice small reductions in the product quantity, if they find out, they will feel cheated and may lose trust in that brand. This, in turn, may affect the profit margins of the company.
Since the product size is not considered while calculating inflation; therefore, value deflation actually works against inflation. The measured inflation is inaccurate in this case because the price tag remains the same.