While inflation remains an issue across the globe, it’s continuing to slow in the US. In March, the rate of inflation depreciated to 5%, with this 1% lower than February’s marker and the lowest recorded rate since May 2021.
This was also below market forecasts of 5.25%, as inflation continues to inch towards the Federal Reserve’s target of 2%. To this end, the Fed may also pause base interest rate hikes soon, after 10 consecutive increases since March 2022 and a recent rise of 0.25 percentage points to 5.25%
While rising inflation may be a diminishing concern stateside, however, businesses are continuing to struggle with higher-than-usual prices and increased borrowing costs. But how exactly are inflation rates affecting US businesses, and are there any positive connotations associated with high inflation? Let’s get into it!
Firstly, Why is Inflation Rising?
There are different reasons for inflation depending on where you are in the world. For example, the UK’s cost-of-living crisis is being compounded by supply chain issues pertaining to Brexit, which is why the rate of inflation across the other side of the Atlantic remains in double digits.
However, inflation in both the US and UK is being driven by some universal factors, such as the war in Ukraine. For example, wholesale energy and oil prices have increased markedly since Russia’s invasion, and while the US is partially shielded from this by its own energy security and internal resources, it hasn’t completely escaped the impact of rising costs.
What’s more, the war in Ukraine is significantly affecting wheat prices, with the country comprising a marked share of the global market for this commodity. With increased scarcity also driving up prices, the US is having to deal with food inflation on a considerable scale, and this issue shows no sign of abating anytime soon.
Addressing the Adverse Effects of Business
The question that remains, of course, is how is inflation affecting businesses in the US (and indeed, across the globe).
Well, there are both negative and positive impacts associated with inflation, with one of the biggest concerns revolving around the sudden and continued increase in the cost of raw materials.
This can be particularly damaging for product-oriented businesses, who must keep a close eye on inflation and the cost of relevant raw materials. In instances where such prices increase, operational costs can soar across the board, with this lowering profit margins and compounding any rises in employee wages that are associated with inflation.
On another note, rising inflation can increase the cost of business borrowing, with lenders factoring inflation into their offers and decision making. At the same time, we continue to see central banks (including the Federal Reserve) increase interest rates as a way of combating rising inflation, with this also enabling lenders to apply a higher premium to financial agreements.
This is based on the notion that inflation and interest rates enjoy an inverse relationship, although hiking the base rate works better as a quantitative easing measure when the inflation rate is closer to 2%.
Are There Any Positive Effects of Inflation?
Remember, inflation describes a general increase in prices and a fall in the purchasing power of individual currencies. This has numerous effects in the economy, meaning that your business may experience positive effects of inflation in some instances.
For example, inflation at a certain level can boost demand, as customers look to complete purchases before they rise further. Of course, this works better as a theory when the inflation rate is higher and moving upwards (as it is in the UK), but US customers may still be looking to optimize value just in case the market moves once again.
If your venture deploys an agile business model that can adapt to the prevailing market conditions, rising or high rates of inflation may also encourage you to become more efficient and innovative in your production, sales and marketing methods. So, instances where inflation persists over an extended period of time, your company may be able to unlock significant operational savings that can boost profitability long into the future.
Finally, inflation can also increase wage growth in some circumstances, potentially increasing your customers’ average spend over a certain period of time.
While this may be offset in part by increased wage bills and salary payments, the deployment of skillful and flexible pricing can help to optimise any advantages and boost your company finances accordingly.
Overall, US businesses can look forward to a brighter future as the rate of inflation continues to decline month-on-month. In the meantime, however, there remain both positive and negative consequences of high inflation, with agile businesses best placed to benefit in the short and medium term.
