How Inflation Affects Your Business And Why You Can’t Ignore It
Chances are you haven’t been giving much thought — or any thought — to inflation lately. Those white-hot increases in the cost of living throughout the 70s, 80s and early 90s are largely a memory now. With inflation idling around 2 percent for the last several years, there are other, seemingly more important, economic considerations in your business life. But that could be misleading. In truth, inflation, whatever the current rate, plays a vital role in your business.
Direct Price Comparisons Can Be Misleading
One of the many complexities of inflation is that its effects are deceptive. It makes direct price comparisons from one year, or one era, to another meaningless. It makes some of today’s products seem expensive when they are actually cheaper, and vice-versa.
Money takes on a flexible value when inflation rears its ugly head. During the Great Depression, a first-run movie ticket sold for fifteen cents. How does that compare with the tab at one of today’s multiplexes? With inflation factored in, a movie ticket should cost about $2.45 today.
Obviously, with ticket prices now running at $12 or higher, it’s costing us a lot more to visit the local movie theater than it did back in the dark days of the Depression (and don’t forget today’s $2.50 Coke that used to cost a nickel).
Of course, the phenomenon in such areas as the price of a movie ticket doesn’t necessarily extend itself throughout the universe of products and services involved in the greenhouse industry. Still, any greenhouse owner paying for medical services or health insurance today is well aware that those costs have risen at a pace that exceeds inflation.
So what does all this have to do with your greenhouse? Plenty.
Direct comparisons of prices can lead not only to a healthy dose of nostalgia, but also to faulty business decisions. Being aware of the true increase in costs after inflation is a necessary part of good financial management.
Inflation Never Lets Up
Inflation rates can vary wildly from one year to the next. However, regardless of the variations, inflation continues its work relentlessly year-after-year. And, of course, each year’s increase compounds on top of the previous year’s.
Even that seemingly harmless 2 percent inflation rate of recent years takes a significant toll over time. After 10 years of 2 percent inflation, that dollar bill in your pocket would be worth only about 82 cents in today’s dollars.
Perhaps more important, it is unlikely that the current low rate of inflation will last much longer. An analysis of the long-term trend over the past 70 years clearly indicates that yet another round of stiff inflationary increases is highly likely.
When President Franklin Roosevelt decided that something had to be done to stop the destructive deflation of the Great Depression, he instituted an economic policy with a built-in inflationary bias. His New Deal in 1933 guaranteed that there would never again be deflation serious enough to disrupt our economy. But his bold move came with a hitch. Inflation, sometimes rising well above 10 percent, would become a permanent part of our economic life.
Inflation may seem to be a tame beast of late, but don’t be fooled. That ravenous predator is poised to come roaring back. Action on your part now will make it easier for you to deal with it when it returns.
How Inflation Affects Your Business
Here’s an example of how inflation has affected your business. If you paid $7.50 for a cubic yard of mulch in 1993, today’s cost for that same amount will probably be about $12.00.
In another example, if you paid $500 for a cash register in 1993, it will cost you about $799 to buy a similar model this year.
Of course, these figures assume that the increases in costs for the items mentioned kept exact pace with the rate of inflation. In practice, the inflated price may be higher or lower than the calculated one.
Either way, the overall costs for running your greenhouse are rising steadily, more or less in step with the annual inflation rate.
That’s why it’s important to understand that when you fail to adjust your prices to keep pace with the inflation rate, you have effectively lowered them.
Are your prices keeping pace with inflation? Are you maintaining your markup over the increased costs you’re paying to your suppliers and wages to employees? If not, the short-term effects may not be especially noticeable, but over the long term, the consequences will be unavoidable: Profits will erode. Your ability to attract and pay quality employees will suffer, and the overall health of your business will enter into a destructive decline.
Yes, raising prices can be a risky business in an uncertain economic climate, but failing to keep pace with inflationary pressures poses an even greater threat. Remember, if you fail to adjust your prices to at least keep pace with inflation, you are effectively lowering them.
How Much Do You Need To Increase Your Prices?
How do you determine the proper amount to increase your prices? If you do it on an annual basis, the calculations for figuring inflation’s effects are simple enough. Just look up the previous year’s inflation rate and adjust prices upward by that percentage.
But calculating inflation’s effects over a period of two or more years can be complex. That’s why it’s difficult to make simple dollar-to-dollar comparisons from one year to another. If you’d like an easy way to gauge inflation’s effects on some specific costs in the operation of your business, log on to WestEgg.com/Inflation. This easy-to-use inflation calculator adjusts any given amount of money for inflation, according to the Consumer Price Index, from 1800 to 2013.
One type of economic comparison that is comparable from one era to another is figures expressed as percentages. For example, the 25 percent unemployment rate reached at the height of the Great Depression would be just as devastating today as it was in 1933. Another economic yardstick that remains valid through the years is the prevailing interest rate. An interest rate of 2 percent on a passbook savings account would bring the same return today (if you could get it) as it brought 60 years ago.
From another perspective, that miserly 1 percent interest rate on your one-year CD today, quite simply, is worth far less to you than the 10 percent you were getting 10 or 15 years ago. Further, with inflation currently running at about 1.5 percent, your investment is actually losing money.
The complexities of inflation and its effect on your business can be daunting when viewed from a strictly technical perspective. However, you don’t have to be a mathematical wunderkind to benefit from an understanding of the inflation phenomenon and how it mandates periodic upward adjustments in the prices you charge your customers.
Raising prices, especially in a less than vibrant economy, may seem distasteful, even harmful, in view of competitive pressures and skittish customers. Still, an understanding of inflation and how it works leaves little room for alternatives.