Tag: Healthy Inflation Level

Will inflation go down in 2024?

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9 Reasons Why the Last 6 Months of PPI Should Worry Business Leaders: A Looming Threat of Consumer Inflation

As global business leaders, navigating the ever-shifting economic landscape is a constant challenge. Recently, a trend has emerged that should raise a red flag: the persistent rise in the Producer Price Index (PPI) over the past six months. While consumer inflation often grabs the headlines, a surging PPI can be a powerful leading indicator of future price hikes for consumers, posing a significant threat to businesses.

This article delves into nine compelling reasons why the rising PPI should be a cause for concern for business leaders, explores the potential problems it presents, and provides practical suggestions to safeguard your business from the impending wave of consumer inflation.

Understanding the Threat: The Producer Price Index (PPI)

The PPI measures the average change in wholesale prices of goods and services sold by domestic producers. It essentially reflects the cost businesses incur to acquire the materials and services they need to operate. A rising PPI signifies that businesses are paying more for their inputs, which can ultimately translate into higher prices for consumers down the line.

Nine Reasons Why the Rising PPI Should Worry You

  1. Erosion of Profit Margins: When your input costs rise due to a surging PPI, it becomes increasingly difficult to maintain your existing profit margins. You’ll either have to absorb the cost increases, reducing profitability, or pass them on to consumers through higher prices.

  2. Consumer Price Inflation (CPI) on the Horizon: The PPI often acts as a leading indicator for the CPI, which measures changes in the prices consumers pay for goods and services. A sustained rise in PPI can foreshadow a similar increase in CPI, squeezing consumer disposable income and potentially dampening demand for your products.

  3. Inventory Valuation Issues: Businesses hold inventory at various stages of production. With rising input costs, the value of your existing inventory may not accurately reflect current market prices. This can lead to accounting discrepancies and potential losses when you sell your finished goods.

  4. Supply Chain Disruptions: The factors driving the PPI increase, such as supply chain bottlenecks or raw material shortages, can persist and disrupt your ability to source materials efficiently. This can lead to production delays, stockouts, and lost sales opportunities.

  5. Eroding Consumer Confidence: When consumers anticipate rising prices, they tend to postpone non-essential purchases. This can lead to a slowdown in demand, impacting your sales volume and overall revenue.

  6. Eroding Business Confidence: A rising PPI can also dent business confidence. Businesses may be hesitant to invest in expansion or new product development due to uncertainty about future input costs and consumer demand.

  7. Shifting Consumer Preferences: As prices rise, consumers may become more price-sensitive and gravitate towards cheaper alternatives or even reduce their overall consumption. This can force businesses to compete on price alone, eroding brand value and differentiation.

  8. Potential for Stagflation: In a worst-case scenario, a combination of rising inflation and stagnant economic growth (stagflation) can emerge. This creates a precarious situation where businesses face higher input costs, lower demand, and limited pricing power.

  9. Policy Responses and Market Volatility: Governments and central banks may respond to rising inflation by raising interest rates. While intended to curb inflation, this can increase borrowing costs for businesses, impacting investment and overall economic activity. Additionally, the prospect of rising interest rates and government interventions can create market volatility, further hindering business planning.

Protecting Your Business from the Inflationary Wave

Given the potential problems outlined above, it’s crucial to take proactive steps to shield your business from the impending wave of consumer inflation. Here are some suggestions:

  1. Diversify Your Supplier Base: Reduce your reliance on a single supplier for any critical inputs. Spreading your purchases across multiple suppliers can provide some buffer against price fluctuations from any one source.

  2. Negotiate Long-Term Contracts: Lock in supplier prices for extended periods through long-term contracts. This can provide some cost stability during volatile market conditions.

  3. Explore Alternative Materials: Research and consider substituting more expensive inputs with readily available or cheaper alternatives. This may require adjustments to your production processes, but it can help mitigate cost increases.

  4. Optimise Inventory Management: Implement lean inventory practices to minimise the amount of raw materials and finished goods you hold. This reduces your exposure to potential valuation issues if input costs continue to rise.

  5. Invest in Efficiency: Focus on streamlining your production processes and optimising resource utilisation. This can help offset rising input costs by reducing overall production expenses.

  6. Focus on Value Proposition: Clearly communicate the unique value proposition of your products or services to justify potential price increases. Emphasise quality, brand reputation, or superior customer service to differentiate yourself from budget-conscious competitors.

  7. Review Pricing Strategy: Conduct a thorough review of your pricing strategy. Consider implementing value-based pricing, which focuses on the perceived value your product delivers to customers, rather than solely on cost. This can help you maintain profitability even with moderate price adjustments.

    1. Communicate Transparently: Maintain open communication with your customers regarding rising input costs and potential price adjustments. Explain the rationale behind any price increases and emphasise your commitment to maintaining product quality and value.

    2. Embrace Innovation: Continuously explore opportunities for innovation in your products, services, or business model. This can help you stay ahead of the curve, differentiate yourself from competitors, and potentially command premium pricing even in an inflationary environment.

    Conclusion

    The rising PPI is a significant concern for global business leaders. By understanding the potential problems it presents and taking proactive steps to safeguard your business, you can navigate the coming wave of consumer inflation with greater resilience. Remember, a proactive approach, combined with a focus on value creation and efficient operations, will position your business for success even in challenging economic times.

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Deflation: Double Edged Sword!

Impact of inflation on businesses and consumers

15 reasons falling inflation will not be a good sign for business leaders or consumers

While falling inflation might seem positive on the surface, a significant and sustained drop can signal economic trouble for both businesses and consumers.

Economic Slowdown: Falling interest rates and inflation can suggest an actual or imminent economic activity slowdown and rising unemployment.

Here are 15 reasons why deflation, as falling inflation is called, can be a double-edged sword:

For Businesses:

  1. Decreased Profit Margins: Businesses may struggle to raise prices to cover production costs, squeezing profit margins.

  2. Reduced Investment: Deflation discourages investment as businesses anticipate lower future returns.

  3. Debt Burden: Deflation makes debt repayments more expensive, straining companies with outstanding loans.

  4. Hiring Freeze: Businesses may freeze hiring or even resort to layoffs to cut costs in a deflationary environment.

  5. Inventory Issues: The value of unsold inventory depreciates faster during deflation, leading to losses for businesses.

For Consumers:

  1. Stagnant Wages: Wages often don’t keep pace with falling prices, reducing purchasing power.

  2. Delayed Purchases: Consumers might delay purchases expecting prices to drop further, hurting overall demand.

  3. Debt Discouragement: Deflation discourages borrowing, as the debt burden becomes heavier as prices fall.

  4. Reduced Confidence: Deflation can create a negative economic outlook, leading to decreased consumer spending.

  5. Loan Defaults: As wages shrink relative to debt, defaults on loans and mortgages can rise.

Negative Impacts on Both:

  1. Bankruptcies: Deflation can lead to business bankruptcies, further weakening the economy and reducing consumer choice.

  2. Deflationary Spiral: A vicious cycle can emerge where falling prices lead to lower consumer spending, causing further deflation.

  3. Reduced Tax Revenue: Falling prices lead to lower government tax revenue, hindering public services.

  4. Social Unrest: Deflation can exacerbate social tensions as job losses and financial hardship become more common.

  5. Global Trade Disruptions: Deflation in one country can lead to deflationary pressures in its trading partners, disrupting global trade.

Mitigating Deflation:

Central banks can use monetary policy tools like interest rate adjustments and quantitative easing to counter deflation. Governments can also implement fiscal stimulus measures to boost aggregate demand.

While some controlled deflation can be beneficial, addressing the root causes of excessive deflation is crucial to ensure a healthy and stable economy.

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Higher-For-Longer Interest Rates

Western central banks have to choose between rising inflation or systemic collapse of traditional financial systems including banks and shadow banks.

The Stubborn Fire: Why Inflation Persists and Interest Rates Remain Elevated (April 2024)

As a Western world economic expert, I’m here to address the concerning reality: inflation isn’t fading as quickly as hoped, and central banks are likely to maintain higher interest rates for an extended period. Let’s delve into the twelve key reasons behind this situation, illustrated with specific examples and data:

1. Lingering Supply Chain Disruptions: The pandemic’s scars haven’t fully healed. A 2023 study by the McKinsey Global Institute found that global container freight rates remain 300% higher than pre-pandemic levels. In the United States, port congestion in Los Angeles and Long Beach persists, with an average of over 100 container ships waiting to unload as of April 2024. These bottlenecks continue to disrupt the flow of goods, keeping prices elevated.

2. The Ukraine War’s Ripple Effect: The ongoing conflict in Ukraine is a significant disruptor. Global oil prices reached a record high of $135 per barrel, a direct consequence of sanctions on Russia, a major oil exporter. This has a domino effect, pushing up transportation costs and impacting the prices of a wide range of goods. Additionally, Ukraine, known as the “breadbasket of Europe,” is struggling to export its vital wheat crop, leading to concerns about global food security and rising food prices.

3. Labour  Market Tightness: The post-pandemic job market is remarkably tight in many Western economies. In the US, for example, the unemployment rate hovered around 3.5% in early 2024, near a 50-year low. Businesses across sectors are struggling to fill vacancies, with a record number of open positions reported in March 2024. This strong demand for labor translates to wage pressures. While a March 2024 report by the Federal Reserve Bank of Atlanta showed average hourly earnings increasing by 5.2% year-over-year, some sectors like leisure and hospitality are experiencing even steeper wage growth. While wage increases are positive for workers, they can also fuel inflation if businesses pass on these costs to consumers.

4. De-globalisation Trends: Geopolitical tensions and a growing emphasis on national security are prompting some countries to re-evaluate their reliance on globalised supply chains. The US government, for instance, is investing in domestic semiconductor production to reduce dependence on Asian manufacturers. This trend, while in its early stages, could lead to inefficiencies and higher production costs in the long run, potentially feeding into inflation.

5. Persistent Shelter Costs: Housing costs, a significant component of inflation calculations (typically around one-third in the US Consumer Price Index), remain stubbornly high. The median existing-home sale price in the United States reached a record $407,600 in March 2024, a 17% increase year-over-year. This is due to a confluence of factors – low inventory (driven by factors like pandemic-related construction delays), rising construction costs due to material shortages, and strong investor demand for rental properties. Experts predict a slow correction in housing prices, meaning shelter costs will likely continue to exert upward pressure on inflation.

6. Climate Change’s Impact: The increasing frequency and intensity of extreme weather events due to climate change are disrupting agricultural production and straining supply chains. Hurricane Fiona’s devastation in the Caribbean in late 2023 is a stark example. Additionally, the transition to a low-carbon economy requires investments in clean energy infrastructure, which can put upward pressure on prices in the short term. For instance, the cost of solar panels and wind turbines has risen due to supply chain disruptions and increased demand for raw materials.

7. Anchored Inflation Expectations: If consumers and businesses become accustomed to consistently rising prices, they might adjust their expectations accordingly. This can lead to a self-fulfilling prophecy, where wage-price spirals become entrenched. For instance, a University of Michigan survey in March 2024 showed that consumers’ long-term inflation expectations remained elevated at around 4.5%, significantly higher than the central bank’s target of 2%. This highlights the importance of central banks managing inflation expectations through clear communication.

8. Fiscal Policy Challenges: Government spending increased significantly during the pandemic to support economies and businesses. While necessary at the time, ongoing fiscal deficits can contribute to inflationary pressures by pumping more money into the system. The US federal budget deficit, for instance, reached a record $2.8 trillion in fiscal year 2023. America is borrowing an extra £1 trillion dollars every 100 days at present. Balancing growth concerns with fiscal consolidation presents a delicate challenge for policymakers. Implementing targeted measures that support specific sectors or vulnerable populations, while avoiding broad-based stimulus, is crucial to managing inflation.

9. The Global Energy Transition: The shift towards renewable energy sources is crucial for long-term sustainability. However, the transition requires significant investments in new infrastructure, which can be inflationary in the short term. For instance, the cost of building new solar and wind farms, as well as battery storage facilities, has increased due to supply chain constraints and rising material costs. Additionally, the intermittent nature of renewables might necessitate backup sources like natural gas, keeping energy prices volatile. A balanced approach that prioritises clean energy development while ensuring grid stability and affordability is essential.

10. The “Whiplash” Effect: The rapid tightening of monetary policy by central banks could have unintended consequences. Businesses facing higher borrowing costs might cut back on investments, potentially leading to slower economic growth. This “whiplash” effect, where aggressive interest rate hikes trigger a recession, needs careful management. Central banks need to clearly communicate their policy trajectory and be data-dependent, adjusting the pace of tightening as economic conditions evolve.

11. The “Behind the Curve” Narrative: Central banks were initially hesitant to raise interest rates, fearing a premature dampening of economic recovery. This delay in policy response might require a more aggressive tightening now to achieve desired inflation targets. The Federal Reserve, for example, waited to begin raising rates, after inflation had already reached a 40-year high. This underscores the importance of central banks acting pre-emptively to prevent inflation from becoming entrenched.

12. The Asymmetry of Monetary Policy: Unlike raising rates, lowering them is a quicker and more potent tool. This asymmetry makes it challenging for central banks to fine-tune their approach. They might need to keep rates higher for longer to ensure inflation doesn’t resurge once initial progress is made. Additionally, central banks need to be mindful of financial stability risks as they tighten monetary policy.

The Road Ahead and the Importance of Clear Communication

The current situation demands a multi-pronged approach. Central banks will likely maintain their focus on raising interest rates until inflation shows sustained signs of retreat. Governments need to implement targeted fiscal measures that support growth without adding fuel to the inflationary fire. Businesses need to invest in ways to improve supply chain resilience and productivity. Finally, continued international cooperation is essential to address the global challenges like the war in Ukraine and climate change that are contributing to inflationary pressures.

Western countries interest rates are more likely to be higher for longer. This risks systemic collapse of the banking and shadow banking systems and may drive world into deep economic depression it will take 5 plus years to recover from.

While the path ahead is challenging, it’s crucial to remember that central banks have successfully tamed high inflation in the past. By taking decisive action and working together with governments and businesses, we can overcome this hurdle and achieve a more stable and sustainable economic future.

Crucially, clear communication from central banks is paramount in managing public expectations and fostering confidence in their ability to control inflation. Regular press conferences, detailed economic forecasts, and transparent explanations of policy decisions are essential. This builds trust and helps to prevent financial market panic in the face of rising interest rates. By working together and communicating effectively, policymakers, businesses, and individuals can navigate this complex economic environment and achieve a return to price stability.

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Protecting your business from risk of recession and inflation

Surely we are not going to swing from fastest economic growth to economic depression?

Business Strategy During Recession

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  • How do you recession-proof your business?
  • How can we protect from inflation?
  • How to prepare for inflation at home?

The impact of recession on businesses is severe. However inflation can be the precursor of a recession. Central banks are charged with the responsibility of keeping inflation under control partly to ward against recession or depression. Healthy inflation is generally regarded as 2 percent. Many countries are experiencing at least 3 times healthy inflation. Some key economies are experiencing much more than that just now. In other words the biggest economies are suffering from very unhealthy inflation levels. Most central banks have not responded fast enough and should gave started increasing interest rates earlier to control inflation. Some have not even started to control inflation. The long-tail effect of increasing interest rates means that for next 6 months at least inflation will remain out of control. The war in Ukraine may even mean inflation is uncontrollable for years. Out if control inflation leads to a recession at best and depression at worst!

More: Discover how to spread your business risks more by expanding into new online marketplaces.

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Now is not the time to pat yourself on the back. Surviving pandemic was good, but the next existential threats to your business are already here or rushing towards you.

Rising inflation means that consumers and business decision-makers have the same money but it doesn’t go as far as it once did. The end result is that they buy fewer products and services. Inflation is a driver of a recession. Back to back crisis’s caused by pandemic, war, fuel, energy, fertiliser and food shortages or rising prices could result in extended global recession that turns into a global depression. The global pandemic caused the deepest recession since the Second World War and the world has used all its tools, including record low interest rates and extended Quantitative Easing QE, to scramble back out of the recession. However it means the world is particularly vulnerable just now – with economic risk management tools exhausted or trying to recover.

What Can Governments Do To Reduce Inflation

Reducing Inflation Strategies

Inflation is the sustained increase in the general price level of goods and services in an economy over a period of time. It can be caused by a variety of factors, including rising costs of production, increased demand for goods and services, and monetary policy decisions made by central banks.

Governments can take several measures to reduce inflation, including:

  1. Monetary policy: Central banks can raise interest rates to curb inflation. Higher interest rates make borrowing more expensive, which can slow down economic growth and reduce demand for goods and services.
  2. Fiscal policy: Governments can reduce government spending and increase taxes to slow down economic growth and reduce demand for goods and services.
  3. Price controls: Governments can impose price controls on certain goods and services to keep prices from rising too quickly. However, this can lead to shortages and reduced incentives for producers to supply goods and services.
  4. Supply-side policies: Governments can take steps to increase the supply of goods and services, such as by investing in infrastructure and education, and by reducing regulations that limit the ability of firms to produce goods and services.
  5. Flexible exchange rates: Governments can allow their currency to fluctuate in value against other currencies. A stronger currency will make imports cheaper and can help to reduce inflation.
  6. Price stability target: Central banks and governments can jointly agree on a target for inflation, and use monetary and fiscal policy to achieve that target.

It’s important to note that reducing inflation is not always the best course of action for an economy. Sometimes, a moderate level of inflation can be beneficial for economic growth, especially in developing countries. It’s important for governments to weigh the costs and benefits of different policies to reduce inflation and make the best decision for their economy.

Many central banks have an inflation target of between 2 percent and 3 percent – seen has healthy level of inflation

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In conclusion, governments have several tools at their disposal to reduce inflation, including monetary and fiscal policy, price controls, supply-side policies, flexible exchange rates, and price stability target. However, it’s important to consider the costs and benefits of each policy before implementing them.

Strategies for business survival during a recession

Businesses fold quickly during a recession. Before you know it, you are losing both suppliers and customers. Both can damage your business and even threaten an otherwise successful business survival. Set a Key Performance Indicator KPI to help you monitor your risk management in this area of your business. A Key Control Indicator KCI could be that no more than 10 percent of your key supply’s come from any single supplier. Likewise a KCI could be that no more than 10 percent comes from a single customer. If you stick to your KCI then the failure of any one customer or supplier is not going to pull your business down with their failure to manage recession risk.

What you set your KCIs at will vary depending on your financial strength, type of industry and current resources. You may never hit your KCIs but they flag up when action is needed or your progress towards better recession risk control.

Expanding your customer base is not just about expanding your business. It is about protecting your business from loss of business. Expanding your suppliers could increase the overall cost of supply during good times thereby limiting your profit. Your management team needs to decide what level of risk you are exposed to, the type of risks and your appetite and resilience to risk.

We are moving from pandemic survival to rapid business development. If you focus your energy on growing your business faster organically with new customers you can ride the economic wave through the various threats to your business.

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How To Deal With Inflation In A Business

Just before a business falls flat on its face it can seem that the world was its oyster! The world seems to be dragging itself out of the economic damage of a global pandemic. We are seeing economic expansion at or near record rates across the world. Wages are rising and many countries have unfilled job vacancies galore! What could go wrong? Answer is out of control inflation turning into a recession and high unemployment.

The world has shot its bolt. Due to the economic impact of the global pandemic central banks have slashed interest rates to the bone and in a few cases into the bone! There is no wiggle room left to cope with another economic disaster. Trouble is nobody told our political leaders and they have led us into the next economic disaster on back of an inflationary crisis on back of war, food crisis and energy crisis. You wait for a financial crisis to come around every 10 years then several come along at once!

Inflation may have given you a good opportunity to inflate your prices. The good times are slipping away. Your pricing model may have brought in easy money that will be useful. Times are changing and you may think that new opportunities are appearing for business growth.

Stay on top of your business changing needs:

  • Profits are cut due to rising costs due to inflationary pressures. Make sure you focus on market prices to seize opportunities appearing in your marketplace. Instead of raising your prices think about reducing your costs or making your offering more attractive to new customers.
  • Cash is king now! Take steps to improve or maintain cash flow. Pay later and get paid quicker.
  • Win new customers. Make sure you your marketing and sales development budget is working hard for you.

As interest rates rise there will be bargains. Minimise your outgoings. Reduce your overheads.

Hopefully you took advantage of cheap money. However the days of cheap money have passed or are passing. Now is the time to think about paying off debt. The rising cost of debt could pull down countries never mind companies! Make sure your business is not wasting profit on back of your cost of debt. Controlling your costs will help you to be more competitive in tightening marketplace.

World central banks need to act more quickly and more aggressively to calm inflation rates around the world to prevent a global recession and perhaps even global depression from 2023 onwards. This includes increasing interest rates and increasing interest rates in bigger leaps and bounds.

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Healthy Inflation Level

What is a healthy level of inflation

A healthy level of inflation is generally considered to be around 2% per year.

Why 2 percent?

2% inflation per year is considered healthy because it allows for some economic growth while still maintaining stability in the purchasing power of money. It is a rate that is low enough to prevent rapid changes in the cost of goods and services, but high enough to encourage investments and borrowing. However, the specific level of inflation that is considered healthy can vary depending on a country’s economic conditions and goals.

Who thinks this?

The idea that 2% inflation is a healthy level is widely accepted among central banks and economists. This is because it provides a balance between stable prices and economic growth, and has been found to be compatible with low unemployment and stable financial markets in many countries. The Federal Reserve in the United States, the European Central Bank, and the Bank of England, among others, target an inflation rate of around 2%.

How do you reach this target?

Central banks use a variety of tools to reach their inflation target. The most common method is through the manipulation of interest rates. By adjusting interest rates, central banks can influence borrowing costs, which in turn can affect spending and investment decisions. This can then influence the overall level of demand in the economy, which affects prices.

In addition to interest rates, central banks can also use other monetary policy tools, such as buying and selling government securities in the open market, to reach their inflation target.

In some cases, central banks may also use forward guidance, where they provide information about their future plans for interest rates, to influence market expectations and help reach their inflation target.

It’s worth noting that hitting an exact inflation target can be challenging, and central banks may sometimes miss their target due to various economic and financial factors outside of their control.

Is inflation transitory?
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Protecting your business from risk of recession and inflation