Consequences of inflation for companies | strategies for your company

Inflation in 2023/2024 often caused companies a great deal of trouble. There are a few things that you could already consider today to cushion the effects.

This is how inflation is measured in Germany:

The inflation rate in Germany is calculated by the Federal Statistical Office using the consumer price index (CPI). The CPI measures the monthly average price development of all goods and services consumed by private households in Germany. In order to capture the change in prices over time, the prices of thousands of products and services are collected in different cities and regions...

Summary - Effects of inflation on companies in 2023 / 2024

Everything about measuring the inflation rate in DE

The CPI is based on a representative basket of goods reflecting consumer spending. This "fictitious basket of goods" includes various categories of goods such as food, housing, health, education, transport and leisure. The individual goods in the shopping basket are weighted according to their share of the total consumer spending.

If, in addition to inflation, the economy grows little or not at all, if unemployment rises, this is referred to as stagflation.

To calculate the inflation rate, the current value of the CPI is compared to a base year. The base year always has an index value of 100. The percentage change between the current index value and the base year gives the inflation rate. For example, if the index goes from 110 to 115, the inflation rate is 4.5 percent.

It is important to note that the inflation rate can vary depending on the composition of the basket and the methodology used to collect the data. Therefore, different countries and organizations may publish different inflation rates.

The consumer price index and the inflation rate calculated from it are of great importance for economic policy and consumers. They serve as important indicators for central bank monetary policy, as they provide information about price stability in the country. Inflation data is also relevant for companies, as they need to be taken into account when setting prices and making investment decisions. Consumers use the inflation rate to better understand the purchasing power of their money and the development of their income.

Learn to distinguish between inflation and deflation with examples

Inflation and deflation are two opposite phenomena that affect the price development and therefore the purchasing power of a currency.

Definition of inflation:

Inflation is an increase in the general price level of goods and services over a period of time relative to purchasing power. The purchasing power of money decreases because fewer goods can be bought with the same amount of money.

Example: If a product cost 100 euros a year ago and now costs 110 euros, the inflation rate is 10 percent.

Definition of deflation:

This is the opposite of inflation and denotes a fall in the general price level. In a deflationary phase, the purchasing power of money increases because you can buy more goods with the same amount of money.

Example: If a product cost 100 euros a year ago and now costs only 90 euros, the deflation rate is 10 percent.

Impact on Debt:

Inflation has a positive effect on debt because the value of debt decreases over time, allowing it to be paid off more quickly.

Example: If someone has a loan of 10,000 euros and the inflation rate is 2 percent, in one year these 10,000 euros will only be worth 9,800 euros in real purchasing power.

Deflation, on the other hand, can make debt a problem as the value of debt increases. Debts become more difficult to repay because they are worth more in real terms.

Example: If someone has a loan of $10,000 and the deflation rate is 2 percent, that $10,000 is worth $10,200 in real purchasing power in one year.

Influence on consumer behavior:

During periods of inflation, there can be an increase in demand for goods and services as consumers tend to spend before prices continue to rise.

When inflation is high, consumers may be inclined to make larger purchases, such as cars or electronics, to avoid higher prices in the future.

Deflation may cause consumer spending to fall as consumers expect prices to fall further. This can lead to a downward spiral, as lower spending leads to lower demand and hence further price reductions.

Example: When deflation is high, consumers might hold back on spending in the hope that they can buy products at lower prices in the future.

Impact on investments:

Inflation can cause investors to look for ways to protect their money from dwindling purchasing power. They often invest in tangible assets such as real estate or precious metals.

Example: In times of high inflation, an investor might decide to invest his money in real estate, as this is usually considered to be a store of value.

In a deflationary environment, investors are often more cautious as prices fall and demand falls. This can lead to reluctance to invest and hamper economic activity.

Example: In a deflationary phase, investors could put their money in safe investments such as government bonds or savings accounts to protect their savings.

Central bank actions:

During periods of high inflation, central banks often take monetary policy measures to control the money supply and bring down inflation. They could raise interest rates to make lending more expensive and dampen demand.

Example: A central bank raises interest rates to bring inflation down from 5 percent to the target level of 2 percent.

In times of deflation, central banks can take monetary policy measures to stimulate the economy and stabilize prices. They could lower interest rates to ease lending and stimulate demand.

Example: A central bank lowers its interest rate in order to counter deflation and restart the economy.

Arrange a free debt check now

Current inflation rate in Germany

You can find the latest developments here.

https://www.destatis.de/DE/Themen/Wirtschaft/Preise/Verbraucherpreisindex/_inhalt.html

Negative effects of inflation on companies

Cost increase: production and material costs.

Inflation can lead to rising costs for raw materials, energy, labor supplies and other operational expenses. Keep an eye on the cost structure and regularly analyze how these changes affect your profits.

Increased borrowing costs:

Higher Interest Rates: During inflation, central banks typically raise interest rates to control the money supply and curb inflation. Higher interest rates often lead to higher interest rates on bank loans and advances. If companies need to borrow money for investment, expansion or other purposes, they could face higher interest costs.

Declining purchasing power and price changes:

When inflation rises, consumers' purchasing power loses value, leading to a reduction in their real incomes. As a result, businesses may face falling demand as customers may spend less or switch to cheaper alternatives. At the same time, however, the costs for raw materials, energy and labor often increase, which leads to higher production costs. Businesses must therefore adjust their prices to compensate for rising costs, which in turn can influence consumer purchasing decisions. This combination of declining purchasing power and price changes can affect a company's profitability and growth during inflation.

Currency risks due to changing exchange rates also play a role:

During periods of high inflation, exchange rates can fluctuate widely and are highly volatile. Companies doing business with other countries need to be aware of the potential impact of this volatility on their finances. Sudden fluctuations in exchange rates can affect the cost of imported goods and services and the value of export earnings.

Companies can hedge against currency risk using instruments such as currency forwards or currency options. A careful hedging strategy can help minimize potential losses from exchange rate fluctuations and ensure the company's financial stability.

Agreements entered into in a specific currency may result in additional financial risks in times of high inflation and exchange rate fluctuations. Flexibility in currency clauses can be an advantage here.

Inflation and exchange rate changes can increase the cost of imported raw materials and components. Businesses need to factor these additional costs into their pricing to ensure profitability. Otherwise, they could get into financial difficulties.

Sound financial planning and effective risk management are crucial for companies during inflation. It is important to analyze the impact of exchange rate fluctuations and inflation on the company's finances and take appropriate action to mitigate risks and seize opportunities.

Employee wages increase:

Even if wages increase in nominal terms, they can still lag behind in relation to the actual cost of daily living.

This is often related to increased operating costs:

For businesses, inflation means they are often faced with rising costs, such as for raw materials, energy and rent. If employee wages do not increase at the same pace as costs, it can worsen the financial situation of employees.

Materials and supplies are reduced:

By excess demand: When inflation rises, so do consumer prices, which can lead people to try to speed up their purchases before prices rise further. This often cannot be serviced quickly enough.Supplier Shortages: When suppliers increase their prices or face shortages/delays themselves in the supply chain, this can result in the company struggling to obtain adequate supplies.Uncertainties and wait-and-see Attitude: In times of high inflation, companies can be more cautious about their investments and inventory management. They might try to reduce their inventories to minimize financial risks if the economic situation worsens. Liquidity shortages: Inflation can also cause liquidity shortages as companies may need more money to buy goods and services but their financial resources are limited are. As a result, they may not be able to stock enough supplies. Impact on Production: When the cost of labor and inputs increases, it can cause companies to limit or slow down their production, which in turn reduces the availability of goods.

Credit Availability:

Rising interest rates can also affect credit availability. If interest rates rise sharply, some companies could struggle to get cheap credit, especially if they are deemed risky. This can affect companies' financing options and growth plans.

debt repayment:

Companies that have already borrowed money may have to pay higher interest rates to repay their debt during a period of inflation. This can weigh on their margins and limit financial flexibility.

Investment decisions:

The increased borrowing costs could also affect the investment decisions of companies. Higher interest rates may make some projects appear less viable, possibly prompting companies to delay investments or be more cautious about borrowing.

Impact on competitiveness:

In an environment of higher interest rates and reduced availability of credit, companies that rely heavily on debt capital may be at a disadvantage compared to competitors that have sound equity structures and are less dependent on debt financing. The company receives protection from enforcement measures and has time to draw up a bankruptcy plan. The continuation of the company is encouraged, which is often more advantageous than breaking up the company.

Positive effects of inflation on companies

But inflation can even have positive effects for companies. Here are a few of the most important factors.

1) Incentive to invest through moderate inflation:

Moderate inflation can mean that companies and individuals do not simply hold their funds in cash, which could lose value. This increases the incentive to invest the money for potentially higher returns.

2) Increased Lending:

During periods of moderate inflation, interest rates will typically be higher than during periods of low or negative inflation. Banks can benefit from this as they can charge higher interest rates on loans, which in turn can encourage more investment in businesses and projects.

3) Increase in company sales:

Inflation can lead consumers to increase spending to avoid future price increases. This can lead to an increase in company sales and profits, which in turn can lead to increased investments in production capacities and expansions.

4) Appreciation of real assets:

The prices of real assets such as real estate and raw materials often rise due to inflation. Investors could therefore invest in these assets to benefit from their potential increases in value.

Which companies from which sectors are most likely to benefit from inflation?

There are certain industries that have high demand regardless of the economic situation. For example, the clothing and food industry is essential despite inflation and can raise prices (while maintaining quality) without losing demand too much. Of course, this does not apply to the luxury segment, although there are exceptions here as well.

Other industries/services/goods that are highly likely to continue making profits despite inflation:

• Manufacturers of medicines

• Financial advisers and financial service providers

• The insurance industry

• Security Industries

• Healthcare: medical specialists and consultants

• Energy suppliers

• Telecom industry

• Educational Sectors

What can companies do about inflation?

Price adjustments:

Check your prices regularly, taking the inflation rate into account. If your costs increase, it may be necessary to adjust your prices accordingly in order to maintain your profitability.

Customer Demand:

Inflation can affect the purchasing behavior of your customers. Observe how the demand for your products or services develops and, if necessary, react with targeted marketing strategies.

Liquidity Management:

Rising prices can lead to an increased need for working capital. Make sure you have enough liquidity to meet short-term commitments and avoid potential shortages.

Contracts and Agreements:

Review existing contracts and agreements with suppliers, customers and employees. Inflation can affect long-term contracts, so it's important to consider possible adjustment clauses.

Investments:

When planning investments, you should take inflation into account. Make sure the expected return on your investments exceeds the rate of inflation to ensure real appreciation.

Steer:

Inflation can also have tax implications. Higher prices can lead to higher sales and thus higher taxes. Keep an eye on your tax situation and consult a tax advisor if necessary.

Currency risks:

If your company operates internationally, inflation can vary in different countries. Keep an eye on possible currency fluctuations and exchange rate risks to protect your international business.

Protection against inflation: This is what you can do for your company

Zufriedener Mitarbeiter am digitalen Arbeitsplatz

Pass on higher costs:

In a period of inflation, companies may need to pass on higher costs to consumers without losing them. Here are some possible strategies that can help:

Transparency and communication:

Explain to customers openly and honestly the reasons for the price increases. If inflation leads to higher costs for raw materials, transportation or energy, most customers will understand if they are attached to your offerings and your brand. Clear communication can help build trust and strengthen customer loyalty.

Gradual price adjustments:

Instead of making drastic price increases quickly, it may be better to gradually adjust prices. Smaller and more frequent increases are often less noticeable to customers and more likely to be accepted.

Offer additional services and added value:

Offer customers additional services or value to justify the price hike. This can be improved product features, extended services or more exclusive offers that offer customers added value.

Pricing in comparison:

Monitor price developments in your industry and how competitors are dealing with inflation. If other companies also make price adjustments, it will probably be easier for customers to accept.

Customer Retention and Loyalty Programs:

Reward your regular customers with loyalty programs or discounts to reward their loyalty. Customers who feel connected to your business may be more willing to accept price increases. Redeemable vouchers or bonus points for the future can also have a positive effect.

Offer of alternatives:

Make sure you offer customers alternative products or services that fit different price levels. Customers might be willing to switch to lower-cost alternatives rather than abandoning your business entirely.

Quality focus:

Make sure the quality of your products and services remains high even as you adjust prices. Customers are more willing to pay for good quality and are more likely to return if they are satisfied with the product.

Conclude flexible contracts:

During a period of inflation, more flexible contracts can help your business handle it better. By integrating flexible clauses that take price and cost increases into account, you have the opportunity to implement price adjustments more quickly and effectively to offset rising costs. This keeps you competitive and minimizes losses from inflation. More flexible contracts also allow for faster adaptation to changing market conditions, making your organization more agile and resilient.

Reduce costs:

Identify inefficient processes and workflows in your company and optimize them. Automation, process optimization and more efficient working methods can reduce costs without sacrificing performance.

Talk to suppliers to negotiate better terms and prices. Regularly compare offers and check the possibility of volume discounts or long-term contracts to reduce costs.

Always keep an eye on your costs and regularly analyze your budget. Identify and avoid unnecessary expenses to save financial resources.

Invest in technology and digital solutions that optimize your work processes and make them more productive. Modern technologies can help reduce costs and increase efficiency.

A motivated and engaged workforce can help to increase productivity and reduce costs in the company. Make sure your employees are properly trained and motivated to perform at their best.

Check your suppliers and look for cheaper alternatives. A diversified supplier base can help achieve better prices and minimize the risk of price volatility.

Outsourcing:

Consider outsourcing certain business functions or services to reduce costs and increase efficiency. Outsourcing can allow you to focus on your core business while reducing costs.

Relying on a broader supplier base:

Look for new suppliers that meet your needs and may offer more favorable terms.

Negotiate with potential suppliers to get better prices and terms.

Diversify your supplier base by sourcing across multiple vendors to minimize the risk of supply shortages and price volatility.

Rely on satisfied team members in the company

Make sure that employees identify with your company:

If employees identify more strongly with the company, they are usually more committed to success. This leads to higher productivity in the company, making it possible to work more efficiently despite rising costs and mitigating the possible effects of inflation.

Keep employees happy to reduce turnover.

When employees are happy with their work environment and the opportunities it offers, they are more likely to stay with the company. This reduces employee turnover and the costs of recruiting and on-boarding new employees, which could add to the burden in a period of inflation.

Create an environment of creativity and trust:

As a result, employees are more willing to contribute new ideas and to drive innovation despite difficult phases. The ability to adapt and break new ground in a period of inflation can ensure a company's long-term success.

Some well-known companies are already feeling the effects of current problems caused by inflation and are reporting bankruptcy.

Current examples of ongoing corporate insolvencies:

The well-known Dutch fashion brand Scotch & Soda has filed for bankruptcy. The luxury food segment is also struggling. Delicatessen Schlemmermeyer based in Munich.