Turns out cheapflation was a thing after all

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Turns out cheapflation was a thing after all

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In 2022, the author, cook and anti-poverty campaigner Jack Monroe triggered a mansplaining epidemic by suggesting that the cost of UK value-brand groceries was rising faster than average food prices. The ONS rejigged its survey in response, then took a few months to say it didn’t see a problem.

A lot about ONS’s methodology seemed weak even at the time. And two years on, its main finding looks plain wrong.

An NBER working paper from Alberto Cavallo and Oleksiy Kryvtsov published last month finds “ample evidence” that so-called cheapflation is a global phenomenon. Their study of grocery prices through the recent inflation surge shows that prices of cheap goods grew between 1.3 to 1.9 times faster than the prices of more expensive brands:

Cumulative inflation rate from January 2020 to May 2024 by Quartile 1 (cheapest) and Quartile 4 (most expensive) products © Cavallo and Kryvtsov

Cheapflation was apparent in all ten countries sampled, say the researchers. The UK had the smallest cheap-to-expensive inflation premium, at 6 percentage points, compared with 14 percentage points in Germany, Italy and the Netherlands:

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Cavallo and Kryvtsov’s data set is much wider than the ONS’s study of just “30 everyday grocery items”. Cavallo is co-founder of Pricestats, a private data provider, so was able to tap unit prices for more than 2.1mn products on sale at 91 multichannel retailers between 2018 and 2024.

The huge sample size also allowed the researchers to measure whether shoppers were able to save money through the period by choosing whichever products were on sale that week.

For anyone with time to spare and no brand loyalties, there were savings to be found. Grocers pushed through price hikes on regular items through the surge but kept their promotional prices aggressively low, with discounts having only a minor effect on overall inflation:

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Cumulative monthly inflation rates for regular price changes, normalised to 100 in January 2020.
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Cumulative monthly inflation rates for sale price changes, normalised to 100 in January 2020.

Such benefits rarely apply for value ranges, which tend to be discounted only when their use-by date is looming.

Using data from the NielsenIQ Homescan panel on the Canadian groceries market, Cavallo and Kryvtsov estimate that, by taking advantage of discounts, shoppers cut their average unit price by 4.1 percentage points. But by switching to ‘cheaper’ brands alone — those with lower non-sale prices — the average unit price increased by 2.8 percentage points.

None of this should be a surprise, since cheapflation trends are fairly easy to explain. On the supply side, discount brands are exposed to global supply chains and input commodity prices with not much of a margin buffer to absorb rising costs. On the demand side, rising inflation and falling real incomes mean spending shifts towards cheaper products.

Pandemic-era stimulus aimed at low-income families added to this increased relative demand, Cavallo and Kryvtsov write:

In the end, even if households were able to save money by purchasing cheaper brands during this period, our results suggest that some of these savings were offset by faster price increases of those brands. Moreover, when overall inflation returned to pre-pandemic levels, 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 ONS last updated its low-cost grocery items analysis (often referred to as the Vimes ‘boots’ index) in October 2022. We’ve emailed to check if the project’s still active. We’ve also emailed Jack Monroe, who has retreated from public life having complained last June about harassment. If we get a reply from either party, we’ll update the post.

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