Are you aware of the impact of Inflation on FMCG prices and consumption?

Inflation is the general increase in prices over time and has significant ripple effects across all sectors of the economy, especially FMCG (Fast Moving Consumer Goods – Food, Non-Food, Non-Alcoholic Beverages and Alcoholic Beverages). Since FMCG products are mostly life essentials, any price hike directly affects household budgets on consumption and business performances.

How Inflation affects FMCG Companies and Consumers

• Rising Input Costs:
  In general, Inflation drives up the cost of raw materials, fuel, packaging, and labour use in the manufacturing of the FMCG products. These increase the cost of production of FMCG, forcing manufacturers to either adjust their pricing or reduce profit margins.
  
• Shrinkflation or Package Downsizing Strategies:
  In periods of high levels of Inflation, instead of raising prices outright, manufacturers often reduce the weight ,size or quantity of products while maintaining the same price. This practice, known as “shrinkflation,” helps manufacturers to manage consumer perceptions but could lead to dissatisfaction
  
• Changes in Consumer Behaviour:
  Prolong high levels of Inflation weakens purchasing power and chips away consumer confidence. In this situation, consumers may switch to cheaper brands, reduce consumption, or prioritise necessities over luxuries. This forces manufacturers and brands to re-evaluate their product mix and pricing strategies.
  
• Pressure on Retailers:
  Retailers face higher operational costs and may struggle to balance price increases with customer retention. This can lead to increased use of promotions, discounts, or loyalty programs to maintain sales volume. In some places, this could lead to price differentiations and hence, price discrimination, especially in retail outlets where the prices are not displayed on the products.
  
• Supply Chain Disruptions:
  General high Inflation levels in a country, often leads to higher fuel and transportation costs, which can strain supply chains. Delays and bottlenecks may further elevate costs or reduce product availability, hence exacerbating the upward prices pressures
  

Impact on the Economy and Society

• Widening Economic Inequality: Inflation hits lower-income households the hardest, as they spend a larger portion of their income on FMCG essentials. This normally leads to cost-of-living crises for some sections of the society.
  
• Policy Reactions: In most countries, the Central Banks are tasked to use monetary tools to deal with inflation. In a high level inflationary situation, Central banks may raise interest rates as a tool to combat inflation, which can slow economic growth and affect investment in FMCG businesses and hence impact on economic growth.
  
• Shift to Local Alternatives: In a high inflationary economic landscape, imported goods become more expensive, potentially, due the impact of the exchange rate. In this situation, demand for locally manufactured substitute goods may go up allowing the local industries to compete and hence, reshaping the competitive landscape.

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