More on how inflation turns us into con artists

by John Rubino
Posted originally March 29, 2011

John Maynard Keynes once said of inflation:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

Here’s one of the “hidden forces of economic law” to which Keynes referred, courtesy of yesterday’s New York Times:

Food Inflation Kept Hidden in Smaller Bags

Chips are disappearing from bags, candy from boxes and vegetables from cans. As an expected increase in the cost of raw materials looms for late summer, consumers are beginning to encounter shrinking food packages. With unemployment still high, companies in recent months have tried to camouflage price increases by selling their products in tiny and tinier packages. So far, the changes are most visible at the grocery store, where shoppers are paying the same amount, but getting less.

For Lisa Stauber, stretching her budget to feed her nine children in Houston often requires careful monitoring at the store. Recently, when she cooked her usual three boxes of pasta for a big family dinner, she was surprised by a smaller yield, and she began to suspect something was up.

“Whole wheat pasta had gone from 16 ounces to 13.25 ounces,” she said. “I bought three boxes and it wasn’t enough — that was a little embarrassing. I bought the same amount I always buy, I just didn’t realize it, because who reads the sizes all the time?”

Ms. Stauber, 33, said she began inspecting her other purchases, aisle by aisle. Many canned vegetables dropped to 13 or 14 ounces from 16; boxes of baby wipes went to 72 from 80; and sugar was stacked in 4-pound, not 5-pound, bags, she said.

Five or so years ago, Ms. Stauber bought 16-ounce cans of corn. Then they were 15.5 ounces, then 14.5 ounces, and the size is still dropping. “The first time I’ve ever seen an 11-ounce can of corn at the store was about three weeks ago, and I was just floored,” she said. “It’s sneaky, because they figure people won’t know.”

In every economic downturn in the last few decades, companies have reduced the size of some products, disguising price increases and avoiding comparisons on same-size packages, before and after an increase. Each time, the marketing campaigns are coy; this time, the smaller versions are “greener” (packages good for the environment) or more “portable” (little carry bags for the takeout lifestyle) or “healthier” (fewer calories).

Where companies cannot change sizes — as in clothing or appliances — they have warned that prices will be going up, as the costs of cotton, energy, grain and other raw materials are rising.

“Consumers are generally more sensitive to changes in prices than to changes in quantity,” John T. Gourville, a marketing professor at Harvard Business School, said. “And companies try to do it in such a way that you don’t notice, maybe keeping the height and width the same, but changing the depth so the silhouette of the package on the shelf looks the same. Or sometimes they add more air to the chips bag or a scoop in the bottom of the peanut butter jar so it looks the same size.”Thomas J. Alexander, a finance professor at Northwood University, said that businesses had little choice these days when faced with increases in the costs of their raw goods. “Companies only have pricing power when wages are also increasing, and we’re not seeing that right now because of the high unemployment,” he said.

Most companies reduce products quietly, hoping consumers are not reading labels too closely.

But the downsizing keeps occurring. A can of Chicken of the Sea albacore tuna is now packed at 5 ounces, instead of the 6-ounce version still on some shelves, and in some cases, the 5-ounce can costs more than the larger one. Bags of Doritos, Tostitos and Fritos now hold 20 percent fewer chips than in 2009, though a spokesman said those extra chips were just a “limited time” offer.

Trying to keep customers from feeling cheated, some companies are introducing new containers that, they say, have terrific advantages — and just happen to contain less product.

Kraft is introducing “Fresh Stacks” packages for its Nabisco Premium saltines and Honey Maid graham crackers. Each has about 15 percent fewer crackers than the standard boxes, but the price has not changed. Kraft says that because the Fresh Stacks include more sleeves of crackers, they are more portable and “the packaging format offers the benefit of added freshness,” said Basil T. Maglaris, a Kraft spokesman, in an e-mail.

And Procter & Gamble is expanding its “Future Friendly” products, which it promotes as using at least 15 percent less energy, water or packaging than the standard ones.“They are more environmentally friendly, that’s true — but they’re also smaller,” said Paula Rosenblum, managing partner for retail systems research at Focus.com, an online specialist network. “They announce it as great new packaging, and in fact what it is is smaller packaging, smaller amounts of the product,” she said.

Or marketers design a new shape and size altogether, complicating any effort to comparison shop. The unwrapped Reese’s Minis, which were introduced in February, are smaller than the foil-wrapped Miniatures. They are also more expensive — $0.57 an ounce at FreshDirect, versus $0.37 an ounce for the individually wrapped.

At H. J. Heinz, prices on ketchup, condiments, sauces and Ore-Ida products have already gone up, and the company is selling smaller-than-usual versions of condiments, like 5-ounce bottles of items like Heinz 57 Sauce sold at places like Dollar General.

Some thoughts:

• When Fed officials claim that inflation is “well contained” are they measuring per ounce or per package? It wouldn’t be a surprise, given how disconnected from reality they frequently sound, if they’re being fooled by manufacturers’ packaging scams.

• If manufacturers are playing games with package sizes you can bet they’re also using cheaper ingredients, so not only are we getting less of our favorite things, they’re probably not as good as they were when we first developed an attachment to them.

• It’s an article of faith among modern economists that a little inflation is a good thing because it lets companies raise prices and workers get raises, so everyone feels richer. But that ignores the other side of the equation, which is, as we’re now seeing, a decline in product quality and producer credibility. In the end we don’t feel richer because we got a raise; we feel ripped off by companies we used to respect.

• Those same economists see deflation as a bad thing because it makes debt harder to carry. But this also overlooks the impact of incentives on behavior and character. Consider: if you make, say, candy bars and the prices of sugar and chocolate are going down, you want to avoid having to cut your selling price because holding the line on price produces a wider profit margin. So you start using higher-grade chocolate or increasing your candy bars’ size — and you let your customers know that you’re improving your products. Your credibility goes up because you’re offering a better deal, and doing so very publicly. As this practice spreads through the larger economy, the result is a culture of quality and integrity and customer service. Where inflation turns merchants into secretive con artists, deflation produces transparent purveyors of ever-better deals. In a deflationary world, our paychecks don’t rise as much, but everyone seems to be working for us rather than trying to rip us off.

• Viewed this way, only an idiot (or a Keynesian economist) would choose inflation over deflation.