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.
Cheapflation: A global phenomenon
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.
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