The Effects Of Inflation On A Business

3 mins read

Fatihah Ramzi, DigitalCFO Asia | 4 July 2022

To effectively address difficulties related to inflation, business executives will need take into account a variety of circumstances.

The decline in the value of real money is one of the detrimental effects of inflation. As a result of rising operating expenses and declining profit margins, this can have a variety of effects on the company. Businesses frequently have to raise prices as a result of this.

If income does not rise at the same rate as inflation, consumers will face challenging circumstances. As a result, consumer spending declines, and corporate sales also decline. More companies and individuals are having to deal with the potential that record inflation rates may continue long into 2022 as a result of rising prices. To effectively address difficulties related to inflation, business executives need take into account a variety of circumstances.

Inflation; Problem Or Opportunity For Businesses?

Companies that manufacture consumer items may find modest inflation appealing. It encourages customers to purchase now rather than wait. A brand’s pricing positioning adjustments may be hidden by inflation. It can be challenging to adjust pricing covertly if all competitors’ prices remain constant. An unobserved structural price adjustment may occur if inflationary forces drive all businesses to modify their prices.

Companies are more seriously concerned about price inflation that is quite high. It makes planning and investment decisions more difficult, and on a macro level, it may be linked to an economy’s tendency toward recession, which results in a decrease in consumer spending. In extreme circumstances, excessive inflation may encourage businesses to keep their stocks on hand longer in the hope that they would one day appreciate in value.

Analyse Market Trends

One problem, like inflation, may rarely be seen in isolation from other problems in business. Since inflation originates from somewhere, if the cause of inflationary pressures swiftly subsides, the issue of inflation may disappear just as fast as it appeared. The issue this time is that there may be numerous underlying and interconnected reasons causing inflation. Supply chain bottlenecks might just be a temporary issue that is quickly resolved. It may be more difficult to overcome the expenses associated with transitioning to a zero-carbon economy (“greenflation”) and the residual impacts of massive amounts of money created by quantitative easing, which drove up asset values.

Brexit and COVID-19 have been blamed for rising labour prices, but declining birthrates and an ageing population may be causing more significant inflationary pressure. In the near to medium term, a generation of baby boomers with sizable pension savings would want to spend their money on younger workers’ services, who will cost more as most European countries face declining birth rates. Prices may continue to be under pressure if there are more dependent spenders compared to productive workers. With these underlying issues appearing to be insurmountable, raising productivity is essential to reducing inflation for both countries and specific businesses.

Is Inflation Here To Stay?

The invasion of Ukraine by Russia and the recent COVID-19 lockdowns in China have coincided, raising concerns among businesses and consumers that the global inflation rate will continue to be high long into 2022. The situation in Ukraine increases the likelihood of price shocks related to food and energy, while restrictions in China are expected to make it more difficult to address supply chain problems. Up until now, price increases have mainly been caused by certain supply chain problems that will probably be fixed over the next six to twelve months. There is cause to believe that firms can beat inflation in the interim. Because of this, many analysts, including Deloitte, predict that inflation will start to decline later in 2022.

There is not much concrete proof of systemic inflation right now. However, thoughtful company executives should consider what the potential effects of increased inflation would be. Businesses should concentrate on the demands of employees to sustain their current personnel and to increase productivity because the labour pool is so restricted at the moment. Businesses should keep an eye out for new client segments and to go after them as inflation also changes market tendencies. Finding these important consumer markets promptly during the inflation would aid in keeping firms afloat and may even result in the creation of new profit margins.