Keeping Your Business Afloat Amidst The Onset Of Inflation

Inflation is defined as a general increase in prices and fall in the purchasing value of money. It occurs when the demand for goods and services exceeds the available supply, driving prices up. This can be disastrous for businesses and often leads to layoffs, company closures, and market crashes. In order to protect your business from the negative effects of inflation, it is important to understand how it works and take action to counteract its impacts.

Inflation statistics in Canada at a glance

According to an August survey of members conducted by the Canadian Federation of Independent Business (CFIB), which represents small and medium-sized businesses, firms expect to raise their prices by an average of 3.8 percent over the next year. That is the highest since records began in 2009, and it is more than double the historical average. [1]

The CFIB findings are just the latest indication that businesses and consumers expect higher inflation to persist for some time. This is a significant development because expectations can drive up prices. For example, if costs are expected to rise, businesses may respond by raising prices, or employees may bargain for higher wages. Higher inflation, in this sense, becomes a self-fulfilling prophecy.

Understanding the market

Market prices play an important role in transmitting information and guiding the economy's resource allocation in an economy where the vast majority of transactions are made in private, decentralized markets and prices are determined by the interaction of buyers and sellers. Economists refer to resource allocation as the overall pattern of production and consumption—which firms produce which goods, how much of each good is produced, what technologies are used to produce it, and how consumers divide their limited purchasing power among the many available goods and services.

The presence of inflation in a market economy and the associated uncertainty, means that prices no longer clearly convey this valuable information, resulting in market outcomes that lack the efficiency that would be achieved in a non-inflationary world.

Market prices still convey information about scarcity when it comes to inflation, but they also convey information about perceptions of the overall inflation rate, which has little to do with scarcity. As a result, in the presence of inflation, buyers and sellers are never quite sure what a high price means: it may either indicate that a particular good is becoming scarcer, or simply that all prices are rising as part of a general inflation. How a small business interprets this is vital to its success and also varies by industry.

The pervasive fear of inflation is that it can erode the value of money, business profits, and wages. While there are many factors influencing inflation and different ways it can affect a business, there are prudent steps that businesses can take to help insulate themselves from these risks. Proven methods for mitigating the impact of inflation on your business include price increases, hedging strategies, and adjustments to your supply chain. By being proactive and understanding how inflation works, you can keep your business afloat during these uncertain times.

References

[1] Inflation Expectations Spike to Record at Canadian Businesses, Erik Hertzberg, Bloomberg, Aug 2021, https://www.bloomberg.com/news/articles/2021-08-26/inflation-expectations-spike-to-record-at-canadian-businesses