Rising prices of just about everything from milk and gas to professional services and clothes impact more than just individual consumers. They’re having negative effects on businesses as well. Companies are being forced to make some tough decisions regarding product pricing, advertising and marketing budgets, expansion plans, and more.
The Consumer Price Index (CPI), the most widely followed measure of inflation, rose 6.2% between October 2020 and October 2021, the fastest rate in 30 years. The CPI represents the average change in what urban consumers pay for a market basket of consumer goods and services. Categories tracked include food, energy, housing, apparel, and services.
Variants of the virus and vaccine mandates continue to create uncertainty globally. Businesses are grappling with worker shortages and higher wages, energy prices, shipping fees, and other costs. In addition, many businesses are experiencing the “Great Resignation,” which is leaving them short-staffed and creating greater inflation in costs for services. Many have no choice but to pass at least a portion of these increases on to their customers to break even or, in some cases, prevent potentially catastrophic losses.
How Did We Get Here?
When the COVID-19 pandemic hit the U.S. economy in early 2020, the government acted quickly by providing unprecedented amounts of monetary and fiscal stimulus to individuals and businesses. Quantitative easing by the Federal Reserve significantly increased the money supply and lowered interest rates. Congress passed relief in the form of extended and enhanced unemployment benefits, economic impact stimulus payments, advanced child care credits, the Paycheck Protection Program, and the Employee Retention Credit, among other measures.
These actions were intended to help maintain or replace household incomes in the face of a shutdown of large parts of the economy. And they were mostly successful in accomplishing their intended purpose. However, while demand was reinforced, a strain in the supply side of the equation created imbalances.
As the pandemic spread, many factories were shuttered, and transportation came to a standstill. At the same time, increased consumer demand for products such as electronics and furniture played a significant role in overwhelming supply chains already disrupted by the pandemic. Now that the economy has started to reopen from quarantine measures, households and businesses face shortages and significantly higher prices for goods and services.
It remains to be seen exactly how everything will play out in the longer term. The purchasing power of a dollar would erode materially over time, even at the Federal Reserve’s relatively low target inflation rate of 2%. However, the trillions of dollars the government spent to save the economy from the effects of the pandemic have contributed to pushing the actual rate of inflation much higher. Couple this with the persistent struggles in the supply chain, it appears higher prices for most goods and services are likely here to stay.
How to Cope
These significant changes require businesses to conduct a deeper analysis and assessment of their operations. They must do this to ensure prices are adjusted accordingly, specific cost-cutting and growth opportunities are identified, and productivity is improved. Increasing efficiency and automating processes can promote financial stability.
Having a better understanding of your operations and finances in real time by implementing tools such as digital analytic dashboards can help in navigating this new and more challenging environment. Realigning your strategy to ensure allocation of assets for long-term success can go a long way.
Taking action is critical given the current crisis we face. We can help you navigate this process. Click here to contact us.