THE "NEW LOOK" OF INFLATION - DON'T FALL FOR IT

>> Chapter 1 “THE WORLD ECONOMY ON THE BRINK OF RECESSION” here.

>> Chapter 3 “SNAPSHOT OF GLOBAL SUPPLY AND DEMAND 2022” here.

Prices for goods and services can always change in a market economy. Some prices rise, while others fall. Inflation happens when the prices of goods and services rise significantly. Simply put, inflation is mostly described as the effect of rising food and oil prices in the economy. 

Is Inflation Good or Bad?

Some economists contend that a low amount of inflation can stimulate economic growth, even though high inflation is generally regarded as harmful. Moderate inflation might indeed be good in some cases. There are two situations where this occurs. First and foremost, it occurs when inflation causes customers to anticipate that prices will continue to rise, which leads to more people preferring to purchase goods now than pay more later as well as short-term demand increases. Hence, store sales and factory outputs are up. This could affect the demand for hiring additional employees. Thus, it boosts economic growth as a result of creating a virtuous cycle.      

Secondly, inflation is considered good when the risk of deflation is eliminated. When prices drop, buyers postpone their purchases to see whether the price would decrease more. Demand declines as a result, and firms decrease their inventories. Because of this, factories produce less and fire employees, leading to rising unemployment which causes wage deflation. Because employees do not have enough money to spend, demand is lower. Thus, companies must reduce their prices. 

Inflation generally has a negative impact, but in some circumstances, it can be advantageous. Are you finding inflation to be good, bad, or both in your situation? 

Causes Of Inflation 

It is divided into three main causes of inflation as follows:

Demand-pull inflation - refers to circumstances where a product or service's price rises as a result of insufficient supply meeting demand.

Cost-push inflation - is the term used to describe price increases brought on by rising production costs for goods and services.

Built-in inflation - when employees demand higher pay to keep up with rising living expenses. This results in an upward spiral of wage and price increases for businesses, who then raise their prices to cover their rising labor costs.

How will inflation dip into your pocket? - The different layers of inflation 

The impact of inflationary pressures felt across the globe has many layers. Rising prices on raw materials, distribution and manufacturing are themselves propelled by various demand-pull drivers such as the pandemic, increased online demand, and political instability. While inflation is often seen as a financial burden, it also has other implications and impacts including but not limited to: increased cost of purchasing goods and services; higher taxes for consumers; rising costs for suppliers; slower economic growth. 

The rising cost of raw materials

Due to pandemic-related supply chain problems including closed ports, warehousing shortages and expenses, and decreased production of certain commodities and products due to sick workers and government-imposed lockdowns, prices for both hard and soft commodities have been rising. Political factors like Brexit or the current conflict have made this situation worse. World oil prices have increased along with those of goods, such as steel, coal, barley, wheat, and maize, that Ukraine and Russia had previously exported in significant amounts as a result of the conflict in Ukraine and the sanctions imposed on the country.

Sustainability is still a driving force behind the demand for rPET and aluminum cans (both in short supply globally), along with paper/cartons as a sustainable alternative to plastic packaging, which is also helping to service the boom for online sales. However, sustainability tends to take a back seat when manufacturers are preoccupied with cost pressures elsewhere. While certain price-push variables, notably those caused by pandemics, are anticipated to level out over the long term (future pandemics excepted), others, such as sustainability, climate change, and resource scarcity, are anticipated to continue exerting long-lasting pressure on prices.

(Source: Euromonitor, 2022)

The rising cost of manufacturing and distribution

The epidemic has affected every link in the supply chain, including labor and transportation. Prices have increased as a result of lingering bottlenecks and shortages of many kinds of items, from machinery and spare parts to shipping containers and warehousing space. Political unrest in certain areas has made things worse by driving up the price of gasoline, which has a knock-on effect on transportation systems. The aging and mobility of labor pools, as well as the rising expenses of manual labor and automation, have raised producer costs and constrained supply chains. Focus on near-/on-shoring has been driven by outlay costs associated with pandemic shortages, sustainability expectations on third-party sourcing, and near-shoring.

Along with demands for repairability and recycling, sustainability legislation has also increased the price of post-consumer waste due to extended producer responsibility; this pressure is anticipated to last for a very long time. The forced adoption of circular manufacturing techniques is meant to gradually reduce the demand for raw materials and waste disposal, as well as the expense involved with doing so. As a result, the impact on costs may be moderated.

(Source: Euromonitor, 2022)

Company and consumer impact

Over the last year, businesses have implemented several techniques to spread expenses and pass some of them on to customers without running the risk of a demand reduction. For makers of foods and drinks, as well as those in the home care, cosmetics, and healthcare industries, among others, pack size has become an increasingly significant area of price innovation. They frequently see decreases in more expensive raw materials, components, or ingredients, as do producers of electrical items. Another technique is to decrease the number of SKUs, which will reduce the variety and availability of products accessible to customers. A third strategy is to decrease the number of price points for the SKUs that are still available, which will cause pricing bands to change.

As producers employ hidden tactics, there is likely to be no change in customer demand in the short term as a result of a price rise. Downtrading is anticipated in the interim as the general cost of living increase begins to bite, with the possibility of overall consumption decline for a variety of industries, particularly discretionary goods, in the long term as volumes start to decline and value sales are supported only by rising unit prices. Premium items will assist keep sales in price ranges intended to keep value sales steady by adding value to the products.

(Source: Euromonitor, 2022)

World current situation

Since the war in Ukraine occurred, private consumption is showing weakness under increased inflationary pressures and mounting uncertainty, and the prognosis for the global economy remains difficult. According to Euromonitor International's Q3 2022 baseline projections, global real GDP growth would sharply drop from a robust rebound of 6.2 percent in 2021 to 3.0 percent in 2022 and 2.9 percent in 2023. As a result of continuous rises in food and energy costs, inflation is expected to soar even higher in many important nations, stifling real wages and consumer spending and further dimming the outlook for global growth. Global stagflation still poses a serious threat. 

(Source: Euromonitor, 2022)

Given its substantial vulnerability through energy imports, the war in Ukraine continues to have a significant negative impact on the European economy. In July 2022, Russia announced more reductions in energy supplies to Europe, heightening the threat of an energy crisis and forcing the EU to adopt an urgent plan to reduce gas use. Although the eurozone's economy continues to be supported by a robust labor market and considerable household savings, the prognosis for the area's economy will be hampered by rising energy costs, escalating uncertainty, and deteriorating foreign demand. The 2022 and 2023 real GDP growth predictions for several eurozone economies, including Germany and Italy, were lowered in Euromonitor International's baseline scenario for the third quarter of 2022. In comparison to the rise of 5.4 percent predicted in 2021, the eurozone as a whole is now expected to expand by 2.5 percent in 2022 and by 1.9 percent in 2023.

The 2022 real GDP growth prediction for the US was reduced from prior projections by 0.5 percentage points to reach 2.5 percent. As pent-up demand is dwindling and high inflation is harming consumer spending power, US consumer confidence has further declined, with a further decrease in June 2022. The US economy will expand by 1.5 percent in 2023, according to Euromonitor International's projection, which is a 0.5 percentage point downward adjustment from its Q2 2022 prediction.

China's economic downturn has also been more severe than anticipated, caused by decreased consumption and disruptions due to the nation's continued adherence to its zero-COVID policy. In June 2022, China's official manufacturing purchasing managers index dropped to 49.0, below the 50-point threshold that denotes activity decline. Economic development is being held back by issues with the Chinese real estate market, which continue to hurt real estate sales and investment. The Chinese economy is predicted to expand by 4.0 percent in 2022 before accelerating to about 4.8 percent in 2023.

How do businesses cope with inflation? 

When it comes to inflation, many businesses are struggling with it, but they have started to find ways to cope with it. These include increasing their production capacity, paying all employees more, offering tax credits and additional allowances by working with suppliers, etc. However, it is not always possible to increase production capacity and pay everyone more. Therefore, many companies are looking for other ways to cut costs. One of the most popular ways is by reducing the number of employees. There are many reasons for companies to reduce their number of employees. One of them is the rising cost of living in the country. Companies need to keep costs down, but they also want to ensure that their products are still affordable. To do this, they have started looking into ways to cut costs without affecting production or quality. This is not a good solution, since you need more people to take care of your customers. The best way to reduce costs is by automating processes and finding ways to make them more efficient. This might help your business to save money and increase profits. Automation is the best way to reduce costs while keeping production going. Automated systems can handle tasks that would normally be done by human workers, which means that you don’t have to hire as many people. This will help you cut down on overhead costs and increase profits without affecting production or quality. 

Furthermore, another effective way to cut costs during inflation is to move your holding company or your manufacturer to those countries that have low inflation rates. Besides cutting off the operating costs such as production, labor, raw materials, and even transportation costs in some cases, businesses might also gain some tax incentives in other countries as well. 

(Source: Statista, 2021)

One IBC is a professional corporate service provider which specializes in helping business owners and investors to establish a foreign company in those countries that help to cut down operating costs. Some of the countries that have both low inflation rates and tax incentives include Samoa, UAE, Saint Kitts and Nevis, Switzerland, and Malta. Contact One IBC for further information about the process of setting up a company in those countries as well as related support. 

What's next for the global economy?

In the last Global Economy Outlook newsletter, we will go deeper into supply and demand to have a better understanding of how it affects this current economic situation, especially, how it affects the manufacturing process when facing lower market demand.

The final chapter will be released on Friday, August 19, 2022. Please stay tuned to our LinkedIn channel.