From swelling prices to shrinking sizes: evaluating the ripple effects of inflation and shrinkflation on the economic growth of BIPS countries

This paper pioneers constructing a shrinkflation variable from the inflation rate function and integrates it into a model to assess its influence on economic growth. It also explores the changing cause-and-effect relationship between economic growth, inflation, and shrinkflation. The findings indicate that shrinkflation's influence on economic growth parallels that of natural inflation, with both exerting a significant negative impact on growth. Hence, the effect of shrinkflation on growth mirrors that of natural inflation, akin to how words imitate natural sounds, as proposed by the bow wow theory. Furthermore, the findings show that both inflation and shrinkflation have a significant predictive effect on economic growth over time, and that causal spill-over varies across BIPS countries. Thus, the economic uncertainty in BIPS nations during the study period was partly due to inflationary conditions and partly due to shrinking commodity sizes.