In the world of the COVID-19 pandemic, the global economy is experiencing massive shutdowns and inflation. As a result, wherever you are right now, the prices of everything from food to essential materials are going up at incredibly high rates. As an example, prices of gas in Europe are trading $522 per barrel of oil equivalent, at the moment of writing.
Consumers are feeling the impact of inflation and high prices. For example, the consumer price index in Europe increased to 113.18 points in February from 112.20 points in January of 2022. At the same time, central banks around the world are putting plans in motion to keep potential inflation under control. That is adding up to the pressure of labor costs. According to Eurostat, Hourly labor costs in the Euro Area rose 2.5 percent year-on-year in the third quarter of 2021, following a 0.1 percent decline in the previous three-month period.
source: tradingeconomics.com
As shown in the chart above, the annual inflation rate in the Euro Area rose to a fresh record high of 5.9% in February of 2022 from 5.1% in January. Energy continues to record the biggest price increase (32% vs 28.8% in January), followed by food, alcohol & tobacco (4.2% vs 3.5%), non-energy industrial goods (3.1% vs 2.1%) and services (2.5% vs 2.3%). The inflation rate is almost three times above the ECB’s target of 2% and is expected to rise even further as the war in Ukraine exacerbated the energy crisis threatening fuel costs to accelerate further.
Moving forwards, inflation has also disrupted the supply chain as one of the biggest perceived risks to growth. Supply chain disruptions have rippled across the global economy in recent months, triggering widespread impacts in both rich countries and emerging markets.
Why are prices going up?
There is no easy answer to this question. After the pandemic shock, and lockdowns, businesses, and consumers have been making up for the lost time. In many industries, manufacturers and businesses were forced to close down production and cancel orders. As a result, car production in Europe has dropped. In the first nine months of 2021, car sales in Europe bounced back, increasing 8 percent, but production rose by only 3.1 percent.
Then there are certain events in the world and Europe in particular that have contributed to inflation. In Europe this winter, energy prices have reached record highs, driven by geopolitical tension. Last year we have experienced challenges with container shipments, as one of them has been wedged in the Suez Canal.
Therefore, macro and micro factors are affecting different businesses in many ways. Geography matters too, especially for products that are costly or difficult to transport between regions. Some exporters may consider partnerships with nearby countries or regions to avoid costly shipping and transport.
With all this in mind, it is extremely difficult to predict when will inflation end. Some argue that the high prices are here for the long term, while others believe that today’s high prices are short-term.
“Inflation will continue to rise and stay elevated for the next several months, though the pace of its growth may start to slow,” said David Frederick, professor of economics at Washington University in St. Louis.
Further pressures could keep pushing prices up. For example, the transition from fossil fuels may mean that next-normal energy prices are higher for decades to come.
How can your business adapt?
We believe that companies can rethink their response to cost increases. Tackling the impact of cost increases across business operations requires a portfolio of solutions. The first and far most common mistake businesses make is rising prices to their customers. If you decide to go down that road, it is very likely your customers will not be happy long term. What can your business do instead? For example, a manufacturing company facing tight supply and productivity conditions had high manufacturing costs and experienced higher demand in a short period than they could supply. Instead of raising prices, they lengthened the lead time on all products to enable more efficient production scheduling. The result was an overall increase in productivity that maintained margins without price increases.
Therefore, instead of raising prices drastically, think strategically. Raise prices slowly in modest increments and choose areas where customers are less likely to notice. Moving forward, depending on your industry and products, customers will react differently according to how price sensitive they are. As an example, your business can adapt by offering multiple products at a higher price point, or offering extended warranties. These are some of the ways that you can justify higher prices. However, your business may need to reconsider its market position. You might want to position your products or services as high-end and target less price-sensitive consumers.
Within larger organizations and businesses, engineers and product designers are rethinking the core products to adjust to inflation. That includes product design, materials, packaging, or even product features. In response to high production and servicing costs while keeping the functionality customers demand.
Navigate inflation
Learn how to coordinate through high prices and inflation. Then, your business will be prepared for what’s to come. Adapt your business operations quickly and precisely to reduce business exposure to rising costs. Either way, if inflation is here to stay or transitory, the focus of your operations will prepare your business. Precise cost models, for example, give teams the tools they need to ensure that the organisation captures its fair share of savings from suppliers when their input costs fall. At the same time, advanced digital solutions and operations help businesses to predict how to improve cost-saving, quality, and supply as the prices change.
Automate workflows, free up workers and make each person much more effective at creating value. At retailers, for example, important associates often spend too many hours, days, and weeks manually inputting item and product data (e.g., case size, pack size, dimensions, website images) when they could be working on more strategic activities, such as analyzing data and generating insights.
To sum up, you need to be able to answer these questions in order to start working on a strategy to navigate inflation. What adds the most value to your business? What’s absolutely necessary? Can you automate any of your processes? Reconsider your supplier relationships and contracts, explore your options. If you need help navigating through the current business climate, please contact our team and we will walk you through the next steps.