Shrinking Sizes, Swelling Prices: Evaluating the Ripple Effects of Inflation and Shrinkflation on Economic Growth Using Dynamic Panel Framework

This study used the novel cross-sectionally augmented autoregressive distributed lag (CS-ARDL) model and the Juodis–Karavias–Sarafidis (JKS) causality test to investigate the intricate nexus between inflation, shrinkflation, and economic growth in 20 countries from 1990 to 2022. The results validated the detrimental effects of inflation and shrinkflation on economic growth, underlining price stability, and reverse or positive shrinkflation as crucial for sustained expansion. Causality analysis further revealed feedback causality between inflation and economic growth. Finally, our findings solidify the quantity-led growth or value-driven growth hypothesis. Reverse shrinkflation, or growth driven by value, drives economic growth unidirectionally. Consumption expenditure increases as the value or quantity of goods and services increase, which boosts consumption, aggregate demand, and economic growth. Hence, to stimulate sustainable economic growth, policymakers should implement prudent monetary policies to control high inflation, a major contributor to shrinkflation. Additionally, industries should be encouraged to enhance productivity and reduce manufacturing costs without sacrificing product size or quality. Lastly, it is essential to monitor pricing changes in critical industries and intervene if unjustified shrinkflation trends emerge. JEL Classification C13, E31, F43