The September inflation numbers were awful. Overall, inflation stood at 8.2% while “core inflation” — a measure of price changes that does not include food and energy — rose 6.6%, which is the highest increase in over 40 years. Given the recent rise in oil prices due to OPEC+ cutting production, there is every reason […]
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The September inflation numbers were awful.
Overall, inflation stood at 8.2% while “core inflation” — a measure of price changes that does not include food and energy — rose 6.6%, which is the highest increase in over 40 years.
Given the recent rise in oil prices due to OPEC+ cutting production, there is every reason to expect inflation will not ebb any time soon. For business leaders planning for 2023, understanding what is really happening with inflation is important to meet your business objectives.
Not all inflation is really inflation
Even the most economic savvy media use the term “inflation” as shorthand for two very different types of price increases.
The first kind of price increase is due to the increase in the money supply. That is, there are a lot more dollars in the economy chasing the same amount of goods. This is what economists mean when they say “inflation.”
The second type of price increase is due to supply chain issues or a reduction in the supply of a good, such as when OPEC+ cuts oil production. In that case, there are the same amount of dollars chasing fewer goods.
The difference is important because the first type of inflation — monetary inflation — is very difficult to control.
Further, the remedy calls for the Federal Reserve to raise interest rates to slow down the economy, which very often will put the economy into a recession.
Recently, the Fed has been doing exactly that and has indicated that it will continue to raise rates until inflation is under control. Consequently, we can expect recessionary pressures well into 2023.
The second type of inflation tends to recover quickly under normal circumstances. Consequently, the prices of goods that were restricted due to supply chain or supply issues will come back down once the supply has been normalized. Of course, “normal” is not a word often used to describe the 2020s.
So, as a chief executive, what should you be looking for, and what should you keep in mind?
What to look for
On the monetary side, there is a tug of war between President Biden and the Fed. If the Biden administration continues to pursue and pass large spending bills, the Fed will continue to push interest rates higher until it is comfortable that inflation is under control. These actions will leave the economy with both high inflation and low or no growth.
On the supply side, things are no better. Oil prices will continue to have a large impact on the supply chain. The OPEC+ production cut combined with continuing restrictions on domestic production will put upward pressure on all oil products.
While the Biden administration has used the Strategic Petroleum Reserve to offer temporary relief, the reserve is near a 40-year low, so its ability to counteract market forces are limited.
The war in Ukraine has forced disruption in grain supplies and, indirectly, in oil supplied by Russia. There is a looming railway strike after one of the unions rejected a tentative agreement with freight carriers.
What does it mean for your business?
The Fed’s action will affect the economy across the board, so you need to prepare for a broad decrease in customer demand by keeping inventories tight(er), especially in long lead-time manufacturing, or for inventory subject to spoilage.
If the Biden administration is able to spend for its priorities, the demand for those products and services will not be as affected, but will still face supply chain headwinds.
Issues with the supply side of the economy will be erratic and uneven in their effect, though transportation costs will remain high. For manufacturers, when less equipment is purchased, existing equipment will need more servicing and repairs.
Think about your ability to increase service revenue. If your customer demand is less sensitive, take advantage of periodic opportunities to acquire inventory at attractive prices.
The end of 2022 and then 2023 will present economic challenges we have not seen in over 40 years. While harder to find, there will be opportunities to thrive for business leaders who can understand and then take advantage of the larger macroeconomic changes.
Steve Henn is a former technology CEO and a current professor of finance and economics at Sacred Heart University.
