Inflation in today’s economy: What it means for you!

What exactly is inflation, and why should you care? Inflation is a huge topic in today’s economy. It seems like every time you turn on the news; there is another report about rising prices and what it means for businesses and consumers. The combination of rising raw material costs and soaring shipping fees means that many agricultural products are becoming increasingly challenging to produce. At the same time, wage rates continue their upward trajectory amidst these changing economic times (Salisu et al., 2021). In the current economy, businesses must be mindful of inflation and its potential effects on their bottom line.

The basics of inflation and how it can affect your business will be reviewed and offer guidelines on protecting your business from these effects. Inflation can have a devastating impact on businesses, particularly small businesses that may not have the same price-increasing power as their larger counterparts. When inflation rates are high, they can eat into profits and make it difficult to stay afloat (Tepper, 2022). Therefore, it is essential to be aware of the various effects of inflation on business and its passing to the consumer.

Here are a few items companies can be aware of and put into place to combat the effects of inflation.

One of the main points regarding inflation is its effects on increasing the price levels of goods and services in an economy. This means that when the cost of living goes up, the purchasing power of your money decreases as you can now buy fewer goods and services at the exact price. This can be caused by several factors, including an increase in the money supply, higher production costs, or simply too much demand for goods and services.

What is the cause of inflation?

The two most common forms of inflation are demand-pull and cost-push. Demand-pull occurs when there is too much buying power for goods. A high enough supply causes this type of inflation; on the opposite side is cost-push, where suppliers increase their prices to make up lost revenue due to increased production or shortage in inventory (typically). The fundamental principle behind all economic activity is supply and demand (Hausken & Lang, 2022).

The recent rise in prices is a worrying sign for consumers, who have been struggling to maintain their lifestyles. According to Forbes advisor, the 7% increase from January’s numbers marks the most considerable annualized percentage change since 1982 (Tepper, 2022). Moreover, the Bureau of Labor Statistics (BLS; 2022) reported the high rate of Inflation in February was driven by significant gains at the grocery store, gas station, and rental units. This puts further pressure on Americans’ everyday lives as they try to maintain their food expense budgets, which have gone up nearly 5% this year alone (Bureau of Labor Statistics, 2022).

How does this affect businesses?

Inflation can have both positive and negative effects on businesses. On the one hand, it can lead to higher production costs, which may cut into profits. On the other hand, it can also spur demand for goods and services, leading to increased sales and revenues. The key is to stay ahead of the inflation curve by accurately predicting how it will affect your specific industry.

What can businesses do to prepare for inflation? Companies can implement a few methods to take a more proactive role.

Review the Pricing Strategy: If your prices are too low, you may not be able to cover your costs as inflation increases. Alternatively, if your prices are too high, you may lose out on the competition. If inflation is on the horizon, it may be time to raise prices in order to keep up with rising costs and make sure prices are in line with the competition and reflect the increased cost of doing business.

The Supply Chain Expansion: Inflation can cause disruptions in the supply chain; therefore, it is essential to have a backup plan in place. If materials are not obtainable on time, being on the lookout for new suppliers of raw material and generating those relationships is an effective way to stay ahead of the curve. In addition, in the case of any shipper who cannot accommodate the shipments, the business is already working with various new suppliers to lessen exposure.

Supply Chain Evolution: The global pandemic has caused many companies to reevaluate their supply chains. The use of technology in the supply chain is not just for efficiency’s sake. Relying on traditional linear models, which can be vulnerable in an emergency, has become strained as recently as during the height of the pandemic. Technology can help businesses keep an eye on their supply chains, avoid disruptions, and ensure customer satisfaction. By using technology, companies can create a more efficient and reliable supply chain that is less vulnerable to interruption and delays. As recent years have shown, inflation can be a significant concern for businesses. However, with a fully digital network to manage their supply chains, businesses can effectively oversee all the products from start to finish, decreasing the number of snags or surprises along their journey, leading to greater customer satisfaction and an increased consumer base (Salisu et al., 2021).

Cost Structure and Diversification: Take a close look at the cost structure and identify areas where costs can be reduced. This will help you offset the impact of inflation on the bottom line. For example, many companies adjusted their products and services due to the changing landscape, such as the pandemic. They also changed how they distributed these goods to stay competitive and extend their reach further by appealing to both new customers and those who had already been impacted with additional methods. Diversifying the products and services is another way to stay ahead of inflation. This can help insulate your business from fluctuations in the market and provide a steadier revenue stream.

Increase Efficiency and Hedging: Increasing efficiency and productivity can be accomplished in a number of ways. For example, it automates processes, reduces waste, and improves the supply chain. Doing so will help the company maintain profit margins in the face of rising costs and save vital resources such as time, delivery, and money. Another way to protect the business from inflation is to hedge the prices. Protecting the company’s many assets can be accomplished in different ways. For instance, setting the prices that are not affected by changes in the cost of inputs (Hausken & Lang, 2022). The most common way is by investing in items that will increase their values when prices go up, such as bonds or CDs (certificates of deposit). You can also purchase asset-backed securities that pay interest rates based on what they are worth today plus some extra amount depending upon how much inflation might reach over time – this allows investors stability and higher returns.

Changing the business structure can be overwhelming; therefore, it is crucial to take the time to consult an accountant before making any drastic changes. The impact of inflation can be significant, but there are ways to mitigate its effects on consumers and companies. By reviewing your pricing strategy, cost structure, and increasing efficiency, you can stay ahead of the inflation curve. There is no sure way to avoid inflation, but by being proactive and remaining aware of the trends in the marketplace, your business can weather any economic storm.

References:

Bureau of Labor Statistics (2022). Consumer Price Index. https://www.bls.gov/news.release/pdf/cpi.pdf

Hausken, T., & Lang, D. (2022). Optica Market Update: The Outlook for Supply Chains, Pricing, Policy and the Market in 2022.

Salisu, A. A., Vo, X. V., & Lucey, B. (2021). Research in International Business and Finance.

Tepper, T. (2022). Why is inflation so high? Forbes Advisor.

https://www.forbes.com/advisor/investing/why-is-inflation-rising-right-now/