Using Business Acumen Skills to Better Understand Inflation

    

Going through a Business Acumen skill building workshop is hard work. Going through a Business Acumeninflation-business-acumen skill building workshop if you have a limited background in business is even harder work.

This week, I am conducting a virtual Business Acumen session for a global audience of high potential leaders, all of whom have strong technical and engineering backgrounds but little to no business backgrounds.

In the session, where participants are running their own simulated companies, they set strategy and then execute the strategy through a series of interrelated operational decisions. As I was facilitating, one of the groups asked about inflation and whether they should consider it as an important impact on their decision making. The reason behind the question is that a lot of companies are talking about inflation, seem to be worried about inflation, but may not fully understand all the impacts of inflation. The purpose of this blog is to share some of the thoughts and insights discussed in today’s Business Acumen program with our readers.

Defining the Complexities of Inflation 2021 and Beyond

When goods and services increase in price, it is known as inflation. This is why you used to pay $3 for a gallon of gasoline last June during the height of the lockdown, but the same gallon of gasoline costs $4 - $5 today. Some degree of inflation is positive and shows that the economy is healthy. If inflation increases too much, it can cause major issues.

Economists track inflation by looking at the same basket of goods and services over time. Then, they express these price changes as a percentage change over that time period. During inflationary periods, the basket of goods and services will cost more. If the price of the basket declines, then we are undergoing a period of deflation which can be worse.

In the post-pandemic world of 2021 and beyond, the demand and supply of goods can impact inflation. For example, the global semiconductor shortage is impacting inflation because of simple principles of supply and demand. If demand is up and supply is down, processes go up. Inflation is also impacted by the money supply and other factors.

In understanding inflation, you need to understand the four different types of inflation to be able to make sense of it all, and more importantly to make the best decisions for your business.

Four types of economic inflation:

Creeping Inflation

Creeping inflation is a type of mild inflation. With this type of inflation, prices generally rise around 3% a year or less. Because consumers expect prices to increase over time, they are more likely to buy products in the present rather than wait for prices to go up. Coming out of the pandemic recession, pent up demand has been keeping creeping inflation at bay.

By purchasing products and services today, consumers boost demand and drive economic expansion. Because of this, creeping inflation is healthy for the economy. Typically, the Federal Reserve would like inflation levels to be around 1% - 2% per year.

Galloping Inflation

Galloping inflation is what happens when inflation is 10% or more. When an economy or market is at this level of inflation, money quickly loses value. Before long, employee wages and business income are unable to match the increase in prices.

Over time, foreign investors will leave countries because of inflationary pressures. This essentially removes the country’s capital sources, which causes additional instability in the local economy. Because of the political and economic hazards of galloping inflation, governments will do everything possible to avoid it.

Hyperinflation

If galloping inflation keeps increasing and becomes out of control, an economy may undergo a period of hyperinflation. This kind of inflation happens when prices advance by more than 50% per month. This type of inflation is almost impossible in today’s complex and regulated global economies. However, we all must remember that in our grandparent’s generation the world experienced this after World War I in Germany and many families will recount the stories of going to the store to buy food with a “wheelbarrow” full if money. This was one of Grandma Rose Brodo’s favorite stories.

Walking Inflation

Walking inflation is vicious and destructive to an economy, but it is not as bad as galloping inflation or hyperinflation. This kind of inflation happens when prices rise between 3% to 10% per year. When economic growth speeds up too fast, it can hurt the economy over the long run.

During walking inflation, people buy extra goods to avoid paying more for them tomorrow. This causes demand to increase excessively. Therefore, suppliers cannot provide additional goods. And as a result, prices increase. Before long, goods and services can become too expensive for the typical customer. We experienced a form of walking inflation during the early days of the pandemic.

In summary, according to U.S. Labor Department data published July 13, the annual inflation rate for the United States is 5.4% for the 12 months ended June 2021 after rising 5.0% previously. This rate is high and the impacts on prices, wages, and other business drivers will continue to be felt. As you think about your business, it’s important to take prices higher at the same time you manage your costs the best you can.

The next inflation update is scheduled for release on August 11 at 8:30 a.m. ET. It will offer the rate of inflation over the 12 months ended July 2021.

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Robert Brodo

About The Author

Robert Brodo is co-founder of Advantexe. He has more than 20 years of training and business simulation experience.