Inflation is one of the key economic indicators and represents an increase in the general price levels for goods and services. The rate of inflation is the percentage change in the price index for a given period. A key indicator of inflation is the Consumer Price Index (CPI) that measures the percentage change in the price of a basket of goods consumed by households. Inflation has implications for businesses and consumers alike, although its effects are not always symmetrical on both. While the effects of inflation can be observed across all the layers of economy from the macro to the micro level, the most crucial and prominent one for the consumer is the loss of purchasing power and for the business is the loss of profitability.
Inflation in the US economy
Historically, inflation has never been an eye sore for the US economy, but recent statistics show a drift from the longstanding tends. According to Trading Economics, sourcing the US Bureau of Statistics, inflation rate in the US averaged 3.24 percent from 1914 until 2021.
However, according to Statista, the rate of inflation has shown a persistently hiking trend from August 2020 to August 2021, increasing from 1.3 percent in August 2020 to 5.3 percent in August 2021. In fact, the inflation rate dipped from 5.4 percent in July 2021 to 5.3 percent in August 2021, denominating a rollback from the 13-year high. Nevertheless, supply-chain bottlenecks, raging energy prices and labor market volatility continue to pose a threat of an inflationary pressure on the US economy and businesses continue to closely monitor the CPI in view thereof.
How does inflation affect businesses?
Simply put, inflation means a loss of purchasing power leading to a reduction in consumer spending resulting in reduced sales for a business and hence dwindled profitability. A rise in the cost of input stresses out profitability, the response to which for the sake of sustainability comes in the form of an increase in the sales price, which means that without an equivalent or compensating increase in income, the consumer’s disposable income will now buy less of the same good or service, leading to sluggish demand and hence reduced sales for the business in future.
Dealing with inflation in the US: a business perspective
As stated earlier, factors such as supply-chain bottlenecks, raging energy prices and volatility in labor markets have caused the inflation rate to move moderately higher from the historical averages. Meanwhile, profitability is of paramount importance to any business as recurring losses can stake its going concern. Therefore, weathering inflationary pressure is an obligation not a choice for a business for which the key is to amicably manage the higher input cost with consumer expectations. This delicate balance can be achieved through structural reforms, including the following:
Process reengineering aimed at reduction of per-unit cost through higher efficiency and elimination of redundant cost components
Long-term strategic investments allowing for harnessing of future growth opportunities
Smart operational spending or conversely operational cost control while ensuring that essential spending is not compromised
Capitalizing on automation to reduce both labor cost and dependency
Nip the Evil in the Bud
Businesses in the US today are cognizant of the fact that the ongoing socio-economic and political developments at the domestic and global level harbinger a potential threat of a growing inflationary pressure in the coming period, mandating a preemptive strategic approach to ensuring sustainability and survival. While some businesses have in-house expertise, most do not.
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