Insight Article Desktop Banner
Global Equity Observer
June 28, 2022


Insight Video Mobile Banner
June 28, 2022


Global Equity Observer


Share Icon

June 28, 2022


Economist Pippa Malmgren has been credited for coining the term “shrinkflation”, meaning, in its most common usage, when a company reduces a product’s size while maintaining its price. A less common usage of this term may refer to the pertinent macroeconomic situation where the economy is contracting while also experiencing a rising price level, perhaps better known as stagflation. Against a backdrop of rising rates and inflation, markets are shrinking too, in stark contrast to the cost of living. March U.S. consumer price index data took the annual rate of inflation to 8.5%, its highest since December 1981.

Shrinkflation is an increasingly common response by companies to inflation – fewer sheets per roll, fewer caplets per bottle, fewer washes per box

Inflation so far has been driven by “stuff”, as there has been a shortage of goods and commodities as economies have bounced back fast from the COVID-19 crisis, given the combination of massive government support and the vaccine miracle, in developed markets at least. This has then been aggravated by further supply shocks in food and energy, owing to the Russian invasion of Ukraine, and may be made worse still if COVID-19 shutdowns affect Chinese production.

The question from here is whether the inflation leaks from “stuff” to “staff”, with rising wage settlements in a tight labour market, and jobs easy to find and hard to fill. U.S. wage growth has accelerated to 5%,1 the highest seen so far this century, though still behind the consumer inflation rate, implying falling real wages. Ultimately, there is a bit of a Catch-22 for companies — either wages rise, potentially squeezing corporates’ margins; or they don’t, threatening real wage falls that could hurt consumption and thus corporates’ top-line sales.

Shrinkflation is an increasingly common response by companies to inflation — fewer sheets per roll, fewer caplets per bottle, fewer washes per box. Brands quietly downsize their products without decreasing prices accordingly, to maintain or boost profits as they try to navigate increases in the cost of materials, labour, energy, packaging and transport, or to maintain market share in the face of stiffer competition for every dollar. The service sector is not immune, with hotel chains making guests opt in to daily room cleaning and not rushing to restore breakfast service post-pandemic. Customers are typically more sensitive to price over contents, and “improved” formulations in a rebranded or repackaged (read smaller) bag are perceived less negatively or barely noticed. However, companies need to be careful of consumer backlash and cannot afford to shrink their products repeatedly or they risk losing consumer trust. In fact, in a world of social media and an emphasis on integrity, shrinkflating companies in 2022 are more likely to need to explain their downsized offerings.

So far, company earnings forecasts are proving largely immune to these fears. MSCI World Index 12-month forward earnings estimates are up 6%2 so far this year, as companies enjoy the inflationary impact on revenues without taking margin pain … yet. Indeed, EBIT3 margins remain at extremely elevated levels, approaching 17% for the MSCI World Index, versus the pre-pandemic peak of 15% and the 20-year average of 13.4%.2 These stretched margins have to be under threat, either from the inflation itself or any slowdown caused by the attempts to tackle the inflation. One key to navigating this environment as an investor is to focus on companies with robust fundamentals that enjoy pricing power — the ability to pass on input costs, be they stuff or staff — to consumers.

  • Staples companies that sell essential products can even increase prices in this tough environment. For example, a multinational consumer hygiene company we hold reported that its strong portfolio of brands has allowed for “responsible price action”, i.e. an increase in pricing of 5% in the first quarter across its business, while a Dutch brewing company we own managed double-digit “price mix” in the first quarter, as it passed on costs, helped by the return to bars and restaurants in Europe. This contrasts with the fortunes of general retailers (which we don’t own), which have suffered the mistake of increasing their inventory of home equipment at a time when a post-pandemic consumer is shifting towards leisure and services outside the home.
  • Mission-critical software-on-subscription models also enjoy fortress-like pricing power and recurring revenues, as an American technology company proved with its announced price increases for commercial products that took effect 1 March 2022. Typically, such announcements are softened with reference to innovative improvements, for example new artificial intelligence tools or enhanced security being included in the price.
  • Payments companies, which take a clip of every dollar in a rising inflation environment, gaining revenue without having to increase prices, are often overlooked inflation plays — never mind that they have been able to effect increases in merchant fees.
  • Within medtech and life sciences, product mix matters, and in some categories like nutrition, it is easier to effect price increases than in more commoditized areas. Medical and scientific supplies companies enjoy some protection, as hospitals and scientists will continue to prize reliability and quality, raising switching costs. This is particularly the case where the products and services provided are a small part of the customers’ cost base.

We started the year very worried about both earnings and multiples. Five months of derating has eased our fears on multiples, though they are not in any way low, as they are still at the top end of their 2003-2019 range — but at least they are no longer a scary 20% above that range. By contrast, our concerns about earnings have continued to rise, along with the earnings themselves, aggravated by the growing risks to the stretched margins from either inflation or a downturn. Given the risks to earnings, it may be a particularly good time to own compounders, i.e. companies that can grow their earnings steadily across cycles because their pricing power and recurring revenue make their earnings resilient in tough times.


1 Source: U.S. Bureau of Labor Statistics Employment Cost Index, March 2022

2 Source: FactSet

3 Earnings before interest and taxation


Risk Considerations

There is no assurance that a portfolio will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market value of securities owned by the portfolio will decline. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this strategy. Please be aware that this strategy may be subject to certain additional risks. Changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, government regulation and economic conditions may adversely affect global franchise companies and may negatively impact the strategy to a greater extent than if the strategy’s assets were invested in a wider variety of companies. In general, equity securities’ values also fluctuate in response to activities specific to a company. Investments in foreign markets entail special risks such as currency, political, economic, and market risks. Stocks of small- and mid-capitalisation companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Derivative instruments may disproportionately increase losses and have a significant impact on performance. They also may be subject to counterparty, liquidity, valuation, correlation and market risks. Illiquid securities may be more difficult to sell and value than publicly traded securities (liquidity risk). Non-diversified portfolios often invest in a more limited number of issuers. As such, changes in the financial condition or market value of a single issuer may cause greater volatility. ESG strategies that incorporate impact investing and/or Environmental, Social and Governance (ESG) factors could result in relative investment performance deviating from other strategies or broad market benchmarks, depending on whether such sectors or investments are in or out of favor in the market. As a result, there is no assurance ESG strategies could result in more favorable investment performance. 

Managing Director
International Equity Team
COO and Head of Client Experience, International Equity
Featured Funds


There is no guarantee that any investment strategy will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market.

A separately managed account may not be appropriate for all investors. Separate accounts managed according to the particular Strategy may include securities that may not necessarily track the performance of a particular index. A minimum asset level is required.

For important information about the investment managers, please refer to Form ADV Part 2.

The views and opinions and/or analysis expressed are those of the author or the investment team as of the date of preparation of this material and are subject to change at any time without notice due to market or economic conditions and may not necessarily come to pass.

Furthermore, the views will not be updated or otherwise revised to reflect information that subsequently becomes available or circumstances existing, or changes occurring, after the date of publication. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively “the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material has been prepared on the basis of publicly available information, internally developed data and other third-party sources believed to be reliable. However, no assurances are provided regarding the reliability of such information and the Firm has not sought to independently verify information taken from public and third-party sources.

This material is a general communication, which is not impartial and all information provided has been prepared solely for informational and educational purposes and does not constitute an offer or a recommendation to buy or sell any particular security or to adopt any specific investment strategy. The information herein has not been based on a consideration of any individual investor circumstances and is not investment advice, nor should it be construed in any way as tax, accounting, legal or regulatory advice. To that end, investors should seek independent legal and financial advice, including advice as to tax consequences, before making any investment decision.

Charts and graphs provided herein are for illustrative purposes only. Past performance is no guarantee of future results.

The representative account has employed the investment strategy in a similar manner to that employed in the team’s separately managed accounts (“SMAs”) and other investment vehicles, i.e., they were generally operated in a consistent manner. However, portfolio management decisions made for such representative account may differ (i.e., with respect to liquidity or diversification) from the decisions the portfolio management team would make for SMAs and other investment vehicles. In addition, the holdings and portfolio activity in the representative account may not be representative of some SMAs managed under this strategy due to differing investment guidelines or client restrictions.

The indexes are unmanaged and do not include any expenses, fees or sales charges. It is not possible to invest directly in an index. Any index referred to herein is the intellectual property (including registered trademarks) of the applicable licensor. Any product based on an index is in no way sponsored, endorsed, sold or promoted by the applicable licensor and it shall not have any liability with respect thereto.

This material is not a product of Morgan Stanley’s Research Department and should not be regarded as a research material or a recommendation.

The Firm has not authorised financial intermediaries to use and to distribute this material, unless such use and distribution is made in accordance with applicable law and regulation. Additionally, financial intermediaries are required to satisfy themselves that the information in this material is appropriate for any person to whom they provide this material in view of that person’s circumstances and purpose. The Firm shall not be liable for, and accepts no liability for, the use or misuse of this material by any such financial intermediary.

The whole or any part of this material may not be directly or indirectly reproduced, copied, modified, used to create a derivative work, performed, displayed, published, posted, licensed, framed, distributed or transmitted or any of its contents disclosed to third parties without the Firm’s express written consent. This material may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law.

Morgan Stanley Investment Management is the asset management division of Morgan Stanley.


This material is only intended for and will only be distributed to persons resident in jurisdictions where such distribution or availability would not be contrary to local laws or regulations.

MSIM, the asset management division of Morgan Stanley (NYSE: MS), and its affiliates have arrangements in place to market each other’s products and services. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. MSIM’s affiliates are: Eaton Vance Management (International) Limited, Eaton Vance Advisers International Ltd, Calvert Research and Management, Eaton Vance Management, Parametric Portfolio Associates LLC, Atlanta Capital Management LLC, Eaton Vance Management International (Asia) Pte. Ltd.

This material has been issued by any one or more of the following entities:

This material is for Professional Clients/Accredited Investors only.

In the EU, MSIM and Eaton Vance materials are issued by MSIM Fund Management (Ireland) Limited (“FMIL”). FMIL is regulated by the Central Bank of Ireland and is incorporated in Ireland as a private company limited by shares with company registration number 616661 and has its registered address at The Observatory, 7-11 Sir John Rogerson’s Quay, Dublin 2, D02 VC42, Ireland.

Outside the EU, MSIM materials are issued by Morgan Stanley Investment Management Limited (MSIM Ltd) is authorised and regulated by the Financial Conduct Authority. Registered in England. Registered No. 1981121. Registered Office: 25 Cabot Square, Canary Wharf, London E14 4QA.

In Switzerland, MSIM materials are issued by Morgan Stanley & Co. International plc, London (Zurich Branch) Authorised and regulated by the Eidgenössische Finanzmarktaufsicht (“FINMA”). Registered Office: Beethovenstrasse 33, 8002 Zurich, Switzerland.

Outside the US and EU, Eaton Vance materials are issued by Eaton Vance Management (International) Limited (“EVMI”) 125 Old Broad Street, London, EC2N 1AR, UK, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority.

Italy: MSIM FMIL (Milan Branch), (Sede Secondaria di Milano) Palazzo Serbelloni Corso Venezia, 16 20121 Milano, Italy. The Netherlands: MSIM FMIL (Amsterdam Branch), Rembrandt Tower, 11th Floor Amstelplein 1 1096HA, Netherlands. France: MSIM FMIL (Paris Branch), 61 rue de Monceau 75008 Paris, France. Spain:MSIM FMIL (Madrid Branch), Calle Serrano 55, 28006, Madrid, Spain. Germany: MSIM FMIL (Frankfurt Branch), Niederlassung Deutschland, Grosse Gallusstrasse 18, 60312 Frankfurt am Main, Germany (Gattung: Zweigniederlassung (FDI) gem. § 53b KWG).


Dubai: MSIM Ltd (Representative Office, Unit Precinct 3-7th Floor-Unit 701 and 702, Level 7, Gate Precinct Building 3, Dubai International Financial Centre, Dubai, 506501, United Arab Emirates. Telephone: +97 (0)14 709 7158).

EVMI utilises a third-party organisation in the Middle East, Wise Capital (Middle East) Limited (“Wise Capital”), to promote the investment capabilities of Eaton Vance to institutional investors. For these services, Wise Capital is paid a fee based upon the assets that Eaton Vance provides investment advice to following these introductions.


A separately managed account may not be appropriate for all investors. Separate accounts managed according to the Strategy include a number of securities and will not necessarily track the performance of any index. Please consider the investment objectives, risks and fees of the Strategy carefully before investing. A minimum asset level is required. For important information about the investment managers, please refer to Form ADV Part 2.

Please consider the investment objectives, risks, charges and expenses of the funds carefully before investing. The prospectuses contain this and other information about the funds. To obtain a prospectus for the Morgan Stanley funds please download one at or call 1-800-548-7786 Please read the prospectus carefully before investing.

Morgan Stanley Distribution, Inc. serves as the distributor for Morgan Stanley Funds.



This is a Marketing Communication.

It is important that users read the Terms of Use before proceeding as it explains certain legal and regulatory restrictions applicable to the dissemination of information pertaining to Morgan Stanley Investment Management's investment products.

The services described on this website may not be available in all jurisdictions or to all persons. For further details, please see our Terms of Use.

Not FDIC Insured—Offer No Bank Guarantee—May Lose Value
Not Insured By Any Federal Government Agency—Not A Deposit

Subscriptions    •    Privacy & Cookies    •    Your Privacy Choices Your Privacy Choices Icon    •    Terms of Use

©  Morgan Stanley. All rights reserved.

Morgan Stanley Distribution, Inc. Member FINRA/SIPC.