How Marketers Trick You into Enjoying Inflation

From Peter Reagan at Birch Gold Group

Americans who have been struggling to keep up with the pace of red-hot price inflation might have to wait a while before it eases.

Of course, the standard reasons for this include: Supply chain issues (yes, still), more costly producer price inflation making its way downstream, and the various Federal Reserve monetary policies initiated by Chairman Powell.

But there’s one more way that the pace of inflation could be maintained for longer than it should, all due to a simple marketing trick.

No, not more advertising, nor some fancy new product packaging. This marketing trick relies on a concept known as positioning, and it even has an absurd name…

“Premiumization” (an old trick making a comeback)

If ingredients are more expensive at the producer level, then at least part of that price inflation is passed down to the consumer in the form of higher prices on the shelf.

That idea makes (at least some) sense during times like these. But an idea that doesn’t make sense is jacking up prices while the pace of inflation is accelerating, and disguising those price increases under a media buzzword.

It’s a decade’s old marketing trick called “premiumization,” and just as you might expect, it involves creating the perception that consumers are getting a premium offering.

Which is great if a premium service or product is actually being offered to wealthier buyers (e.g. luxury hotel accommodations). Not so great if it’s an ordinary ho-hum item being pitched as “premium” to those who still have to live on a budget.

The New York Times summarized this rather absurd tactic:

Big companies are prodding their customers toward fancier, and often pricier, versions of everything from Krispy Kreme doughnuts to cans of WD-40.

It’s evidence of the corporate world’s new favorite buzzword: “premiumization.”

Businesses are hoping to keep the good times rolling after several years in which they seized on strong spending by consumers and rapid inflation to raise prices and pump up profit margins. Many firms are embracing offerings that cater to higher-income customers – people who are willing and able to pay more for products and services.

But according to Greenbook, “premiumization” isn’t limited to luxury items, the idea is to justify the increase of prices on commodities and other regular consumer items:

When we say premium, we are not talking about luxuries like Gucci or Prada, but rather reasons why customers would be willing to pay more for products. For example, if the average category price for a roll of toilet paper is 0.84 cents premiumizing toilet paper is getting customers to pay 0.89 per roll.

Taking this example at face value means a consumer would be paying sales tax, inflation (at least 5%), and another 6% simply based on the luxury perception a toilet paper manufacturer creates.

I called this an old trick because it’s at least as old as Upton Sinclair’s 1906 masterpiece, The Jungle:

All of their sausage came out of the same bowl, but when they came to wrap it they would stamp some of it ‘special,’ and for this they would charge two cents more a pound.

It’s a gimmick that costs us a whole lot more than two cents a pound these days.

The lower and middle class consumers won’t be able to afford as many product choices, or would be forced to pay more for what could be little (if any) additional value:

When brands prioritize selling premium goods to higher-income consumers, they may provide fewer products and experiences for the middle class.

Across the US auto industry in 2017, 36 car models were available for less than $25k, comprising ~13% of new car sales. Last year, the number of models under $25k fell to 10, taking up 4% of new car sales. By reducing the number of goods produced, premiumization could also keep inflation high.

So, essentially, this approach to marketing products is geared more to the wealthy, who can still afford these products and services while inflation is still running hot.

Of course, an idea like this doesn’t seem like it would be sustainable once a recession hits, and the pool of wealthier buyers dries up.

But for now, the marketing trick that spawned in the wine industry during the 1990s is still driving revenue. That trend is thanks in part to the ~30% (or so) of affluent buyers who can afford to buy consumer staples at premium prices.

An older Forbes piece from 2016 ended with a relevant question for strange economic times like these: Who doesn’t want to experience something better?

The answer is: Most people naturally want to experience something better, if they can afford it. If inflation eased quite a bit, that would help.

Hoping this inflationary trend doesn’t become the norm seems futile at this point.

Build resilience against future pricing uncertainty

I expect prices will continue to rise – whether due to increased costs, or simply to pad corporate profits. That’s how inflation works. Even if the rate of inflation magically went to zero overnight, higher prices would be here to stay.

A decline in inflation doesn’t mean prices go down – it just means prices rise less quickly.

If you’re thinking prices shouldn’t rise this quickly, the facts disagree with you. However, I can understand your perspective. As shocking as it is, the dollar’s purchasing power has dropped 15% since the beginning of the pandemic panic – barely two years ago!

That’s right – your dollar has lost 1/6^th of its purchasing power that quickly.

With a store of value this unstable, it’s incredibly challenging to plan for future expenses. How much will a dollar buy in a decade, let alone next year? We just don’t know…

Right now, prudent people saving for the future are wondering: How can we protect ourselves against the declining dollar and maintain our purchasing power?

The answer: Learn about the benefits of diversifying your savings with inflation-resistant investments (we’ve devoted an entire page to the different types and the pros and cons of each).

That also means today is a good time to learn how physical precious metals like gold and silver earned their safe-haven reputation over centuries. Tangible assets like gold and silver are often relied on as protection against inflation (and many other economic challenges). Right now, a lot of Americans are rushing to buy gold because it’s just about the only thing you can spend your dollars on today that you can be sure will still be worth something tomorrow.

2023, Featured, inflation, retirement savings, us dollar