(Roughly) Daily

Scheduling note: the press of travel and obligation will make it impossible for your correspondent to post for the next few days; regular service should resume on or about Friday the 11th…

Rising prices prompted many consumers to shift to lower-cost goods from premium brands. However, as Ana Elena Azpúrua reports, an analysis of millions of products by Alberto Cavallo shows how inflation hit budget products harder in many countries, a phenomenon called “cheapflation”…

Surging inflation drove many consumers to cheaper brands or lower-quality products, but new data suggests that switching might not have saved them as much as they might have expected.

During the most recent period of high inflation, prices of the least expensive products increased more than those of the costliest, according to an analysis of microdata from large retailers by Harvard Business School Professor Alberto Cavallo. In a forthcoming article in the Journal of Monetary Economics, Cavallo and coauthor Oleksiy Kryvtsov, senior research officer at the Bank of Canada, refer to this phenomenon as “cheapflation.”

In the United States, the prices of the cheapest food products climbed 30 percent between January 2020 and May 2024, outpacing the 22 percent increase of the fanciest foods.

Kryvtsov and Cavallo, the Thomas S. Murphy Professor of Business Administration, analyzed millions of products from more than 90 big retailers in 10 countries, including detailed price data for products within the same categories, something that’s been difficult to study. After creating indexes tied to pre-pandemic prices, the researchers concluded that “cheapflation” isn’t unique to the US…

… The price gap between cheap and expensive goods widened most as inflation was peaking, but the spread remained even as prices stabilized, eating away consumers’ potential savings.

“Prices for cheaper brands grew between 1.3 and 1.9 times faster than the prices of more expensive brands, and only when inflation surged, not before or after,” the researchers write.

Why? Cavallo and Kryvtsov find evidence of an increase in the relative demand for cheaper products, as consumers shifted their spending from high to low-priced varieties in an attempt to lower their grocery bills. They also point out other reasons, including targeted fiscal stimulus, which likely increased the demand for cheaper varieties, and the possibility that cheaper products tend to depend more on global supply chains, like the ones disrupted by COVID-19. At the same time, the profit margins of cheaper goods could be tighter than those of makers of high-priced goods from the same category, adding pressure to raise prices as supply costs increased.

But when inflation decreased, “the relative prices of cheaper options remained permanently higher, even though the inflation inequality abated. This may help explain why some consumers may think that prices are ‘too high’: not just relative to the past, but also relative to more expensive varieties,” the authors write…

One reason we’re feeling the pinch: “Charting ‘Cheapflation’: How Budget Brands Got So Pricey,” @anaeazpurua on @albertocavallo in @HBSWK.

* Henny Youngman

###

As we scrimp, we might send developed birthday greetings to Jakaya Kikwete; he was born on this date in 1950. And economist and politician, he served as finance minister then President of Tanzania. Kikwete was instrumental in the political and economic reforms that have led to Tanzania being called “a success story” and served as chairperson of the African Union (in 2008–2009) and the chairman of the Southern African Development Community Troika on Peace, Defence and Security (in 2012–2013).

Since stepping down as President in 1915, Kikwete served as the African Union High Representative in Libya and as a member of the UN’s Lead Group of the Scaling Up Nutrition Movement.  Since 2022, he has been a co-chairing the Commission for Universal Health convened by Chatham House, alongside Helen Clark.

source