According to the Institute of Fiscal Studies (IFS), inflation rates skyrocketed across the world between 2021-2023, reaching their highest rate for over 30 years.
But this inflation did not affect households equally.
“Food and fuel prices rose particularly quickly, disproportionately eroding the purchasing power of lower-income households,” said a spokesperson for the IFS.
Further to this, the price increase on private label products has been greater, in percentage terms, than higher-priced ‘premium’ products.
This phenomenon has come to be known as cheapflation and it’s having a major impact on consumer and manufacturer behaviour.
How is cheapflation impacting consumer behaviour?
Global economic instability has hit consumers hard but, as with so many things, it’s lower-income households, which are feeling the effects more profoundly as they’re less able to absorb the increase.
What’s more, it’s the lower-priced products which are undergoing the most significant changes.
“Prices of the least expensive products have increased more than the more expensive equivalent products,” Mark Lynch, partner at corporate finance advisory firm Oghma Partners, told FoodNavigator.
However, it’s also affecting higher-income households, as economic uncertainty is encouraging them to trade down to the now higher-priced “cheaper” products.
“Consumers looking to trade down from a premium product to a private label product are saving money, but less than they might have expected, as there have been price increases on private label products,” says Lynch.
Many families have spent the past year skipping meals and cutting down on food to try and cope with higher prices
Rachelle Earwaker
The difference here though is that higher-income households can still afford to complete a full food shop, without having to remove any items. Lower-income households do not have that same luxury.
“Many families have spent the past year skipping meals and cutting down on food to try and cope with higher prices,” said Rachelle Earwaker, senior economist for the Joseph Rowntree Foundation.
And it’s not just consumers who are altering their behaviour. Manufacturers are making changes too.
How is cheapflation impacting behaviour of F&B manufacturers?
Cheapflation is also impacting the behaviour of food and beverage manufacturers through reformulation.
“Lower priced products are seeing a shift to cheaper ingredients so the quality declines,” says Lynch
This is yet another blow to lower-income consumers who are getting lower quality products for their money.
“Value for money is declining at a greater rate than the more expensive products,” says Lynch.
Will cheapflation continue or is there an end in sight?
The good news for consumers is that cheapflation has stabilised. However, the effects are still being felt by consumers meaning they’re unlikely to change behaviours, and increase spending, any time soon.
“Food price inflation remains high, despite the bigger than expected fall in headline inflation,” said Joseph Rowntree Foundation’s Earwaker.
Furthermore, reversal of the situation is expected to take a while.
“Over time, we expect that competitive forces will drive value item prices down, relative to premium priced products,” says Oghma Partners’ Lynch.
As a result, the price difference between higher-priced premium products and lower-priced more affordable products, will also be reestablished.
“One of the reasons for cheapflation was compressed manufacturers margins,” says Lynch. “As these manufacturers seek to rebuild their margins again, this will act with deflation on lower-value items to reverse the previous cheapflation trend and rebuild the pricing differential.”
However, a big question mark remains over whether manufacturers will choose to return to the use of higher-quality ingredients in their lower-priced products.
