Can inflation have a positive impact on businesses?

24 August 2022

Currently, inflation is at a 40-year high at 10.1%, but it’s set to increase to anywhere between 13-18% by the start of next year.

advice : Leadership and Strategy

Generally, we hear inflation and our mind goes somewhere totally negative. We all know that there undoubtedly are worrying negatives when it comes to inflation, such as supply-chain disruptions, increased cost of materials, decreased consumer purchasing power, higher interest rates, reduced employment, and so on. And while it is daunting, it’s also important to look at how good things could potentially come from inflation for businesses, to focus on emerging from this inflationary period in a good position.

Currently, inflation is at a 40-year high at 10.1%, but it’s actually set to increase to reach anywhere from 13-18% by the start of next year. This is the time to turn these foreboding warning signs on their head, to help businesses prevent disruption to their workforces, and overcome a time of economic turbulence. Here’s how inflation can have a positive impact on businesses.

Increase in spending and investment

As inflation rises, the value of money decreases, and this is a huge concern for those looking to make purchasing decisions. For example, there is a huge boom in the housing market right now, because buyers are moving their purchasing decisions forward much quicker, rather than waiting until next year when houses are likely to be more expensive. Even if there’s a chance of the market settling, it isn’t worth the risk for many. This applies to all kinds of products and assets, not just houses, and even applies to investment. If someone can see the value of their savings decline in the bank as the value of their money increases, they’re going to look elsewhere to find higher-yielding investments.

Improving margins on existing inventory

In times of inflation, the demand for a particular service or product increases, leading to the supply decreasing. If a business has a high inventory, then they’re in a really beneficial position. They can either take the opportunity to sell it at a higher price than they had planned, thus drastically fattening up their margins. Or, they can take an alternative route to better margins. A lot of businesses that also have high inventory will be increasing their prices, so it can become a useful competitive method. While businesses will probably have to increase their prices somewhat, it’s beneficial to do this gradually and not to an extreme – a lot of competitors will take the other route. Rather than driving prices up to ridiculous heights like the competition, businesses can slightly undercut their competitor’s pricing, empowering their market share growth.

Existing debt becomes cheaper

As we’ve mentioned, inflation depletes the value of money. Interest rates rise to combat inflation, which means getting into new debt can be a lot more expensive. So, it actually cheaper to hold onto old debt rather than pay it off, only to enter into new debt. But do note that new debt can become old debt very quickly if the inflationary period is predicted to last for an extended amount of time. In this case, it could be a good idea to borrow money early into the inflation cycle at fixed interest rates, so you can use it to your business’ advantage before borrowing costs are too high. This is especially important for businesses that have expansion plans in the foreseeable future, in order to financially support those plans before the costs make them unattainable. Also, your competitors might wait until they really need to borrow cash before they get into debt, by which point the costs could be too high for them.

Higher wages

As the cost of living crisis wagers on, more and more businesses are looking to put up the wages of their employees. It might not necessarily seem like a benefit, especially when businesses are trying to cut costs themselves, but it leads to something that every business so desperately needs – employee productivity. A higher wage economy drastically improves efficiency, effort, commitment, dedication, quality, and in turn, productivity. Businesses also put off potential top-level employees by offering lower wages. And when at least 40% of companies say their workers have asked for higher pay, it’s clear what the people want. Even though businesses are paying their workers more, they can still emerge even stronger in the aftermath of inflation, thanks to high productivity increasing employee’s drive. Essentially, it pays off to have higher pay.

It’s better than deflation

While it necessarily isn’t a positive impact on businesses, taking stock of the fact we’re not in a period of deflation is a positive spin on the situation. Deflation completely destroys the economy. It can increase the debt burdens of individuals, businesses, and governments. This can destabilise public services, reading a huge number of bankruptcies as businesses, governments, etc. fail to make repayments, which only grow in price. The most well-known example of this is the Global Financial Crisis of 2008, which led to at least 2.7 million job losses in the UK.

Need some guidance?

Take a look at our Hub on inflation, where we have collected all the available guidance and resources to help business leaders wade through this period of the unfavourable economic outlook. And as always, we’re here to help. Get in touch if you’d like advice on how best to cope with these rising challenges from a financial point of view.

Nothing on this page is intended to be or should be construed or taken as accountancy, investment, tax or any other kind of advice. We recommend individuals and companies seek professional advice on their circumstances and matters.