Jul 27, 2022
6 Hidden Costs of Inflation Impacting Your Business's Growth
Prices have been consistently rising over the past few months. This is happening worldwide and experts predict that this inflation will stick around, so it’s high time to take a look at the possible and hidden costs of inflation on your business.
Read along to discover the status of inflation in America, discover how this can impact your business’s growth, and how you can mitigate such effects on your business.
The June 2022 CPI Report
The Bureau of Labor Statistics published its report on the Consumer Price Index for June of 2022. The final report of a 9.1% year-over-year increase turned out to be higher than the expected 8.8%, signaling the Fed to take more drastic measures to combat inflation.
The consumer price index (CPI) measures the average price change in market goods, making it a reliable measurement of inflation for even the government. The Federal Reserve includes the CPI in making decisions on the country’s money supply to combat inflation or to boost the economy.
A surge of 9.1% in inflation creates forecasts of higher Fed rates, lower GDP from decreased consumer spending, and higher layoffs due to low revenue from corporations. This level of inflation affects everyone, including your business.
Drivers of Inflation
While inflation means a general increase in the value of goods and services and a decline in the value of money, there are many factors that can drive inflation. Here are some of the biggest drivers of inflation in the post-pandemic era of 2022.
Higher Wage Demands
Prices have been steadily increasing since the pandemic. As such, the demand for wage increases also persists in the global labor force. This is a problem businesses are dealing with on top of a labor shortage from the retirement of millions of baby boomers.
If wage increases, businesses will also have to increase their prices so that their profit margins can cope. Now exists a peculiar situation where labor force participation is at its lowest in 40 years, in spite of rising prices in commodities.
Continued consumption also drives inflation. The post-pandemic era has the entire world eager to experience what it was deprived of during lockdowns and travel bans.
Today’s consumption has increased business’ profit margins, making it agreeable to continue increasing prices to make up lost revenue from covid-19 lockdowns.
Inflation then continues with the participation of consumers in increasing demand for goods and services while supplies are low due to global supply chain disruptions.
Oil Price Surge
While gas prices started to decrease in late June, its natural volatility divides inflation watchers between being optimistic and pessimistic about the future. The embargo recently placed on Russia also continues to keep the supply of crude oil tight.
Investor pressure to maintain capital discipline has also been cited by oil execs as the primary reason for the change in gas prices. This means, as addressed by President Biden, refineries have increased prices and tripled their profit margins without increasing the supply of gas in the market.
Overall, these two major drivers of gas prices contribute to the price inflation that the general population experiences right now.
Supply chain delays of up to 18 months hit the world due to the pandemic. In 2021, business logistics costs increased by 22%, putting a strain on both businesses and consumers worldwide.
Access to vaccines is also still not at equal levels internationally, continuing supply chain disruptions that are met with a surge in demand from consumers.
Economic Impact Payments, also called stimulus checks, also contributed to the growing cost of inflation. While these payments aimed to help people during a global crisis, the trillions of dollars injected into the economy also naturally decreased the value of money.
Globally, recovery from the covid-19 pandemic has started, but the differing paces of each nation cause a crisis, mainly coming from supply chain problems, that have yet to be resolved through indigenous means or local production.
These factors come together and add up to the inflation levels the world market sees now and is still in the process of resolving.
Drastic Increase in Fed Rates
The Federal Reserve recently increased its interest rate to control inflation, making history with the most aggressive hike since 1994. Another big hike is expected this July, starting with at least 75 points, with a 44% chance of being a full 100-point increase, ending at 2.75%
This means that borrowing from the Federal Reserve is becoming increasingly expensive for banks and corporations–a burden that will end up shouldered by consumers and small businesses.
This will lead to higher prices from producers, higher credit card and banking rates, and even higher mortgage rates for homeowners and renters.
6 Hidden Costs of Inflation
Making sense of the cost of inflation on your business involves finding out the key factors that drive prices up. The effects of these factors are not only felt by consumers but also by businesses both big and small. Here are some ways inflation can impact your business’s growth.
1. Increasing Quit Rate
Lower levels of inflation are tolerable and sometimes unnoticeable over time. However, as prices surge to unprecedented levels, the overall cost of living for a lot of people becomes more expensive.
While businesses provide cost-of-living adjustments to their employees, there are those who end up in higher tax brackets because of it. This becomes problematic for those who end up with less disposable income because of the increase in their income tax.
This phenomenon leads current employees to quit their jobs as cost-of-living adjustments actually leave them with less money to spend.
2. Labor Shortage
Labor force participation continues at its lowest in 40 years. Part of this is due to the generational change that the global workforce is experiencing as millions of baby boomers choose to retire.
Another driver of the labor shortage is the demand for higher wages that a lot of businesses have yet to provide. A move like Amazon’s new benefit for its employees helps increase job desirability, but it’s not something that a lot of other companies can easily emulate.
Besides that, a lot of workers have become disillusioned with the traditional 9-5 job, and have taken the opportunity to start new businesses while at home, contributing to the rise of entrepreneurship.
3. Supply Chain Delays
Other parts of the world are also on their way to recovery from the covid-19 pandemic, albeit at differing paces. This means supply chain delays continue to drive up prices and material scarcity for a lot of businesses.
While local production for raw materials and other needs has yet to match local demand, it’s imperative that businesses take a new approach to addressing the scarcity of raw materials. This will, however, inevitably affect every business and its patrons.
4. Higher Borrowing Rates
One of the costs of inflation that directly affects your business is the Federal Reserve’s interest rate. This rate dictates whether it’s a good time to be borrowing money from banks and creditors or not.
As fed rates maintain a tight monetary policy with high rates, borrowing to cover losses or resolve existing problems may cause an even bigger, long-term problem for a lot of businesses.
Higher interest rates inadvertently make it more expensive for businesses to borrow whether it’s for operational costs or expansion projects. If your cash flows show signs of needing financial assistance from external sources, be very strategic about how you’re going to approach spending and returning it.
5. Loss of Customers
Price hikes will naturally drive customers away from spending. This goes for a lot of businesses, even those in the essential goods sector.
Businesses are either losing customers or experiencing decreased profit margins as consumers become more discreet with their finances.
Unless you’ve managed to sustain the demand among your customers, you should be cautious of losing customers in the near future because of inflated prices.
6. Cash Depreciation
The value of cash depreciates drastically during economic inflation. This means that unless your money is invested somewhere that protects it from inflation, you're actually losing value as the inflation keeps on.
Combating the Hidden Costs of Inflation
Inflation affects everyone, but it’s not impossible to survive and thrive during this economic crisis. With the circumstances surrounding today’s inflation and possible recession, here are some ways you can inflation-proof your business.
1. Invest Your Cash
Investing is a highly recommended strategy by economists and investors when it comes to protecting businesses from the costs of inflation.
While banks also offer some level of interest on your money, leaving it to sit there won’t help your business in hedging value against inflation.
Consulting with a financial advisor or two is your best bet to finding which investments are best at the moment to make sure your business’s finances survive the effects of economic inflation.
2. Find New Revenue Streams
Finding and nurturing new revenue streams for your business is a project you can take on during inflation. Successfully done, this can help your business find a permanent way to increase revenue in the future.
The trick is to find a revenue stream that doesn’t require immense capital investment but also revives your profit margins. Perhaps your business can start going into eCommerce, rent out spaces or equipment that it owns, create subscription-based services, or start selling ancillary products.
If you have the capacity for it, nurturing a niche market is also a good revenue stream you can develop for your business. New revenue streams can not only help out your business through inflationary periods, but you can even find one that supports your business for unprecedented events in the market.
3. Decrease Your Business’s Expenses Through Outsourcing
As a cost-cutting measure, you can start outsourcing tasks and roles to offshore virtual assistants. Offshore outsourcing is a strategy leveraged by many businesses for years, allowing them to grow faster from the outsourced productivity and labor cost savings.
Hiring from other countries nowadays doesn’t require you to fly in a specialist to work for you anymore. You can remotely work with professional virtual assistants and enjoy the financial benefits of outsourcing to countries where labor is much cheaper.
4. Maximize Your Business’s Automation and Efficiency
In the era of digital business transformation, the many hidden costs of inflation on your business can be reduced by leveraging automation in your business processes.
This means using helpful apps and software services that automate processes in your day-to-day operations.
Automation removes human error in business processes and even speeds up repetitive tasks.
By relying on technology to offload some of your work, you can expect faster speed to market and higher productivity and efficiency from your organization.
5. Practice Empathy Marketing
Using empathy to market a brand and its products or services can tap into the 86% of consumers who are willing to spend more for a great customer experience.
Practicing empathy marketing in your business can revamp your profit margins when you are successful in making your customers feel valued. This is a valuable strategy in an inflationary period.
One example is changing the tone of how you communicate with your potential customers. In their copywriting A/B testing, MarketingExperiments discovered a 349% increase in total lead inquiries after empathizing with their recipients’ anxiety with their free-trial signup.
If you already have the technology to monitor and analyze your customers’ interaction with your brand, all you have to do is to develop and implement changes that sympathize with their entire experience.
Working with empathy during an economic downturn can have long-term benefits for your business not limited to increases in customer satisfaction, lifetime value, and average purchase value.
Outsourcing During High Inflation
Facing the costs of inflation on your business is inevitable. Your only choice is to act on it as early as possible or recover what you can from the effects of inflation.
Of the five strategies you’ve just learned, the fastest you can implement are outsourcing and automation. If you’re quick with analyzing customer data and creating a strategy, you can also quickly incorporate more empathy into your marketing.
If you’re simply overwhelmed with all that you have to do to protect your business from the costs of inflation, you can start with outsourcing your tasks to a virtual assistant.
Virtual assistants are highly reliable in that you can have them perform your day-to-day tasks, manage projects, implement automation, and even lead their teams. All that for a lower cost than a local employee, saving you up to $60k a year.
If you’d like to get started with outsourcing to offshore virtual assistants from Virtudesk, you can fill out this form so one of our Consultants can get in touch with you.
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