We all feel inflation, even if some of us do not call it that, but the economic consequences of inflation directly or indirectly affect society – as a whole, because inflation is an imbalance that influences and affects, in different proportions, all global economies.

In this article, I would like to examine the key factors behind inflation, the different types of inflation, the measures that can be taken and who benefits from it.

Inflation can be a major concern because it makes the money saved today less valuable tomorrow. Inflation erodes the purchasing power of the consumer and can even interfere with the ability to have a profitable company in these times of financial turmoil, because no company, regardless of size, has control over it.

For example: if an investor earned 6% of the investment in various stock packages, but the inflation rate was 3.5%, the investor earned only 2.5% in real terms.

“Demand inflation” can be a healthy thing for any economy as it is a growing demand for products and services which confirms the rising standard of living of the population.

The problem arises when prices rise for all goods and services, without a corresponding increase in their demand. This is the imbalance, marked by inflation. The elasticity of supply, the increase or decrease of the physical volume of economic goods in relation to the variation of incomes are decisive for the installation of inflation.

It is obvious that if the amount of money increases and the amount of goods and services does not increase properly, the value of money decreases. In other words, the purchasing power of money decreases – what we can buy now with a monetary unit we will not be able to buy in the future except with a larger number of monetary units.

Quantity of monetary units required = money supply / quantity of goods and services

Some reasons why inflation sets in are:

• increasing the price of oil, gas, electricity – generates price increases in the chain
• increasing taxes
• excessive credit growth
• decrease in goods and services
• but by far the biggest catalyst for inflation is the printing of money by states.

The COVID-19 pandemic presented the ideal conditions to generate inflation once countries around the world began injecting trillions of dollars into their economies. Many countries, including the United States, have printed money to meet the incentive requirements for their citizens.

In a healthy economy, all existing money must be equal to the total value of existing goods and services.

As I mentioned earlier, during the inflation period a company can be profitable but at the same time go into insolvency.

For example: Company X sells a large quantity of goods to a customer Y with a payment term of 30 days. If customer Y is an important customer (customer who has a very large impact on the cash flow of company X) and maybe a discount has been granted, so that company X has a net profit of 5%. During the 30 days, until the bill expires, inflation increased by 6%.

In this context, Company X lost more than the net profit it expected due to inflation.

The most beneficial would have been to sell only with immediate payment. Unfortunately, the economy does not work this way for several reasons (objective or subjective).

Hence, what do we have to do? Here are some simple steps you can take to help keep inflation at bay.

If inflation is at the national level, foreign exchange risk in most cases is an important / determining factor in the impact of inflation.

The basic principle is to be very careful (as far as it depends on us) that income and expenses and consequently assets and liabilities are in the same currency or at least linked to the same currency. By eliminating currency risk, we can survive inflation.

If inflation is global, as expected soon, the above principle is necessary, but not sufficient. We are protected from currency risk, but not from inflation, which is not represented by this risk.

In these cases, to protect us from the negative effects of inflation:

• we must supply ourselves with raw materials as soon as possible
• investments on the financial market with a higher return than inflation, because over time the assets keep their value better than the receivables or the money. We can also look for investments that ensure our indexation to inflation.
• investments in gold, EFTs, etc.

Who benefits from inflation? There are companies that can benefit from inflation if they can charge a higher price for the products they sell because of rising demand (demand inflation). For example, if the economy is booming and the demand for real estate is higher than the supply, real estate developers may charge higher prices per square meter built (power pricing phenomenon) which can contribute to increased profit margins. If the profit margin increases, it means that the prices that companies charge for their real estate increase faster than the production costs. However, companies can also be affected by inflation when production costs start to rise (boomerang effect).

Conclusion: My recommendation is to find an individual and viable solution for each company, depending on its field of activity, the country in which it operates and the general environment in which it operates. Not paying much attention to this topic can sometimes be … too late.

Book a meeting with us for financial consulting for the good of your company’s future.