Inflation is something that we’ve all been hearing about lately. Considering how serious this issue is, it’s quite surprising that many people (including business owners) know close to nothing about inflation and the impact that it can have on the world we live in. This lack of knowledge can lead to businesses cracking under the pressure that’s imposed by the economic effects of inflation.
Because of the growing threat of inflation to businesses, you’ll want to make sure that you are prepared as possible. This is why we thought it would be useful to put together a brief discussion on this subject. If this is something that you need to know about, read on as we discuss everything that you need to know about inflation and how you can best prepare for it in a way that ensures the success of your business and other related ventures.
What Is Inflation?
Before we can talk about how your business can deal with inflation, it’s important that we’re all on the same page about what inflation actually is. Without going into the details, inflation refers to a rising Consumer Price Index (CPI). The Consumer Price Index is the average price of a representative sample of goods. Because the cost of living depends on the average consumption of different goods, some goods will increase in price, while others will decrease. This basically means that the overall inflation as measured by the CPI will vary. This can get confusing, so there are two types of inflation to clarify which goods are increasing in price and how much. Annual inflation refers to an increase (decrease) in the cost of living, compared to one year ago.
Inflation occurs when the value of a currency drops over time. When the value of a currency drops, prices go up. This means that the amount that a certain currency can buy decreases. Since the value of a currency drops, the price of both goods and services increases. Basically, this means that the overall spending power of each individual household drops depending on the degree of inflation.
Should You Worry About Inflation?
While inflation is normal, high rates of inflation is definitely something that should concern you. Huw Pill, the Bank of England’s chief economist, who oversees the UK economy has warned that high rates of inflation could last longer than expected because of severe housing and energy infrastructure shortfalls.
Huw Pill said he expected inflationary pressures to decrease over the long term, but even so, there were growing risks that inflation would persist in 2022. This is due to disruptions caused by the COVID pandemic and the economic repercussions attached to Brexit.
Writing to MPs on the Commons Treasury committee, he said:
“That balance of risks is currently shifting towards great concerns about the inflation outlook, as the current strength of inflation looks set to prove more long-lasting than originally anticipated. The magnitude and duration of the transient inflation spike is proving greater than expected,”
In a regular survey of firms, the Office of National Statistics reported that 29% reported a sharp rise in costs. This is up from 21% in May and 14% in late December.
Due to severe shortages of building materials, including cement, plasterboard, timber, and power tools, construction companies had to raise their prices by more than half in the past year, which was more than double the average in any other industry.
The inflation rate will rise to more than 4% this winter as wholesale gas and electricity costs soar. Inflation is expected to stay high until summer 2022 at the very least when wholesale prices should start dropping again.
Figures from the National Grid also indicated that gas prices have more than doubled since the start of the year and have risen by 213% since the start of January alone, on top of a 71% increase in August.
What Is Causing Inflation?
With inflation being intrinsically linked to supply and demand, various companies in multiple sectors have been plagued by shortages of raw materials, problems across supply chains, and a shortage of people in recent months. The government is taking steps to tackle these shortages while also attempting to alleviate ongoing issues with labour shortages in the services and hospitality industries. These supply shortages have occurred for numerous reasons, including a lack of job security, poor pay rates, and Brexit. By August 2021, there were 1,034,000 job vacancies available in the UK; vice-versa, there were not enough people to fill these jobs. The unemployment rate was still above pre-Covid levels.
The rate of those who are not working has been decreasing since comparable records began in 1971, and this is generally the case. However, COVID-19 affected hundreds of thousands of workers, who had been temporarily sick or had chosen to retire. Discouraged workers are typically not seeking new jobs because they do not feel that they will find any; they also do not feel like they will be able to support themselves if they do find a new job. One reason that workers have become discouraged is due to a lack of job security in some industries and a lack of job prestige. As well, some workers choose to not look for jobs because they believe they will not be able to get one.
The amount of employees that have been furloughed in the last year has also contributed to inflation. Early in August, by the end of which unemployment would rise above 5% for the first time since the pandemic, 1.6 million people remained furloughed throughout the country while 1.1 million jobs were still available. While the increase in unemployment would be the second-worst on record in comparison to the outbreak, Chancellor Rishi Sunak maintained that most job vacancies would be available in low wage sectors, including agriculture and food service. However, he did not rule out the possibility that unemployment would continue to rise as a result of furlough ending and jobs becoming more available.
How Does Inflation Affect Businesses?
When raw materials and manufacturing costs increase, businesses sometimes have to absorb these costs to avoid losing customers. However, businesses often transfer part or all of the increased cost to their customers to avoid losing them. To add to this, inflation also affects the total revenue that businesses make. When inflation rises, the price of goods goes up. Because consumers have less money than they used to, they can't buy as much. This means businesses will make less money as their total revenue decreases.
It’s also important to note that the way that businesses are affected by businesses can differ. The effects of inflation largely depend on the nature of their market, the types of products and services they offer, and their brand strength. For the most part, essential goods and services are less affected. This is because consumers will still spend money on them regardless of the economic situation. However, when prices rise for non-essential goods, consumers are more likely to reduce their spending on them as these goods and services can be pretty much done away with.
Industries with fewer sellers are also more resistant to the effects of inflation. When there are fewer sellers in a given market, consumers have fewer choices. Therefore, when an industry consists of only a few competitors, businesses selling within it might experience less of an impact of inflation than those selling within highly competitive markets.
Lastly, brand power also plays a major role when it comes to the effect of inflation on a business. People are willing to spend more on branded goods than on general goods. When consumers must choose between two similar products, they are willing to pay more for the branded version than for the general version. This is because they know that the brand is a reliable indicator of quality. Demand for branded products is less elastic than demand for general products, making it easier for producers to raise prices without losing customers–and make higher profits in the long run.
How Can Business Owners Prepare for Inflation?
While things may seem dire, you’ll be glad to know that there are ways that businesses can deal with inflation. To properly deal with inflation, you’ll need to make the necessary preparations and adjustments to help cope with the fluctuation of prices and consumer spending power.
If you’re expecting to face inflation issues, it may be time to reevaluate how sustainable your business model is. Doing this will result in a competitive advantage for companies that can develop a sustainable way of doing business. Since your revenues may drop, you’ll want to make sure that you’ve trimmed all the fat and efficiencies in your day-to-day operations.
When it comes to combatting inflation, it’s important to be proactive. By preparing while inflation is low, you can counteract it when it increases. Many companies are passive about adapting to the changes in their product and marketing mix, but disruptive companies continually review these things and try to improve them. For example, you could market higher margin products through channels that sell faster. However, resist the urge to implement changes that are sudden and spontaneous.
Aside from the things we mentioned above, you'll also want to consider amending your employment package in a way that makes your business more likely to attract high-quality employees. This is a factor to take into account given the staff supply shortages currently. When it comes to inflation, staff supply shortages is a factor that you'll definitely want to consider. Many people’s relationship with work is changing. They are switching from creating a closer relationship with their work to understanding the value of the job. Given the uncertainty in the economy at the moment, some may be willing to move from job to job if the cash flow allows it. The best way to show your appreciation for employees is by giving them a raise and keeping them on your payroll. Flexible working hours and job enrichment also incentives employees, but finding the right mix of incentives varies by company. Make sure you’re listening to what employees want and need, and be aware of how the company is performing and where it’s aiming. Any rewards you offer should balance the company goals with what motivates your employees.
For the best results, you’ll want to make sure that your business is insured against credit risk because there will be customers who, when prices start to fall, will refuse to pay you, even though they promised they would. To avoid losing everything, make sure you do business with several customers so that if one of them defaults, you won't be completely ruined.
Companies need to prepare for inflation by proactively engaging with their profit and loss accounts. They need to consider whether their pricing is still appropriate and in line with the market. They also need to monitor costs and monitor productivity to ensure they can continue to do business while offsetting inflation. The last 18 months have shown that companies can reduce costs and maintain the same productivity, allowing the company to not only keep up with inflation but perhaps even prosper during those times.
We hope this article helps further your understanding of inflation and how it can affect your business. While things may seem daunting for business owners, the information that we’ve laid out should be enough to help you cope with the aftereffects of inflation. By preparing today, you’ll be able to soften the blow that inflation can have on your business. Be sure to keep everything that we’ve discussed here in mind so that you can make the most informed decisions for your business.
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