Inflation has ruined one of my go-to examples for my macroeconomics students. Whenever I discuss inflation with my students, I test their understanding of economics by highlighting the puzzle of the Dollar Tree, an American retail chain that sells goods at discount prices. Between the year the Dollar Tree was founded (1985) and today, the price of goods and services have risen 2.63% on average every year.
However, in spite of unpredictable swings in the economy and prices, one store has remained consistent throughout it all. Dollar Tree has long been known for being the last true âdollar storeâ which spans the whole US. For the last 35 years, when you walked into the Dollar Tree, you knew you wouldnât spend more than one dollar per product.
All of that is changing, however. After 35 years, the Dollar Tree has announced theyâll begin to carry products with a price over one dollar. This invites two important questions: how was the store able to keep prices low for so long, and what is changing now?
Dollar Tree and the Art of Shrinkflation
To figure out why the Dollar Tree has decided to raise prices now, itâs important to consider why and how theyâve gone without changing prices for so long. As any bargain shopper knows, the Dollar Tree isnât really the cheapest option out there. Buying large quantities in bulk is going to get you the best per unit money price every time. So if the Dollar Tree isnât offering the cheapest per unit price, whatâs the draw?
In a word:Â consistency.
Consumers like consistent prices and product availability. Thereâs nothing more annoying than going to a store and seeing an empty shelf or a price tag double what you expected. People know what to expect at the Dollar Tree. Need a box of candy for a movie? Thatâll be one dollar please. Looking for a travel size shampoo? You know where to find it. Want a cheap toy for your kids? No sticker shock at the Dollar Tree.
This is why Dollar Tree is so resistant to price changes. In a world of credit cards, is $1.50 that much harder to swing than $1? Not for most. But that isnât the point. People appreciate the one-dollar ceiling at the Dollar Tree. It makes it easy to plan.
But how does the Dollar Tree do it? When there is inflation, the value of a dollar falls. How can the Dollar Tree offer the same products year after year in exchange for a less valuable dollar?
Let me answer that question with another question. Why donât you buy all your phone chargers at the Dollar Tree?
The Dollar Tree does carry chargers for phones, and theyâre certainly cheaper than the prices on Amazon or at Walmart. So why doesnât everyone get their phone charger from the Dollar Tree?
Most of you probably have an answer. Dollar Tree phone chargers are awful.
If you buy a phone charge from the Dollar Tree, itâs probably because you had an emergency. You know that it will probably only work for a day before it breaks. And here is our answer. The Dollar Tree doesnât offer the same products every year for a less valuable dollar. They offer worse products for the less valuable dollar.
By spending additional resources, companies that make phone chargers can make them more resistant to wear and tear. If you have an iPhone, you may have at some point purchased a charger with a metal cover rather than the cheap plastic that breaks. These chargers are better, but theyâre more expensive to produce. The Dollar Tree can use this logic in reverse. By making their phone chargers lower quality every year, theyâre able to offset the fact that the one dollar used to purchase the charger is less valuable.
Another way the Dollar Tree can keep their prices low is by shrinking the size of a product. Is the dollar 5 percent less valuable this year compared to last year? Easy fixâmake your shampoo bottles hold 5 percent less shampoo. Economists call the practice of reducing the quantity or quality of a good while keeping its price the same shrinkflation.
Shrinkflation is a form of inflation because youâd have to spend more money to get the same quantity or quality as you did in a previous year. The prices have remained the same, but the products are worse.
The Limits of Shrinking
Itâs no secret that the US is experiencing higher than desired inflation over the last year. Recent inflation numbers show inflation well above the 2 percent target set by the Fed. Some measures have inflation at its highest rate in three decades. Just recently, Atlanta Federal Reserve President Raphael Bostic admitted inflation âwill not be brief.â This flies in the face of Federal Reserve Chairman Jerome Powellâs claims over the last few months that inflation would be âtransitory.â
So, inflation is higher, but then why would Dollar Tree raise its prices? Why not just use shrinkflation techniques to combat inflation? The answer is straightforwardâthere is a technological limit on how low quality you can make your products.
Consider, again, the Dollar Tree phone charger. People donât mind the bad quality, because they expect it. If it breaks after 5 charges, thereâs no surprise. Hereâs the problem though: there is a minimum amount of inputs you need to make a charger work. If the Dollar Tree tries to cut the use of raw materials like metal in a charger, thereâs only so much they can cut before the charger doesnât work at all. If a charger doesnât work for at least one charge, selling it is simply fraud. There are technological limits of shrinkflation.
The unprecedented move by Dollar Tree is unsurprising, then, given higher rates of inflation. The rampant money printing since January 2020 has caused the value of the dollar to fall, and Dollar Tree has decided that the cost of trying to force the quality of some products down even further is greater than the cost of alienating customers by raising some prices above a dollar.
So, although $1.50 phone chargers may not be the end of the world, I believe this change is a signal. Itâs a signal that high price levels are expected to persist, and even the store with the stickiest prices must now let them rise. Inflation fought a 35 year war with the Dollar Tree, and, in the wake of unprecedented money-printing, inflation won.
Our Dollar Tree Stores in BC Canada have been $1.25 for a few years now so we saw it coming lot sooner… it is hyper-inflation but that is denied. Most smart people (yes there is such a thing) are wise to this a long time ago.
Another sign of changing world is that the Dollar Tree was the only place you could get AKJ Bibles for $1.25 for a pocket or book size in black or white cover. I have been buying them and handing them out to the homeless or beggars for years now. They are no longer selling them? Plus the Biblical Children’s Stories are diminishing? At least here in my area of BC Canada Dollar Tree I can no longer get them? Sad?