Chart credit: https://www.macrotrends.net/2497/historical-inflation-rate-by-year
For anybody born after about 1985, meaning most folks under 40, all this talk about inflation seems kind of old-timey. Indeed, as Public Radio host Kai Ryssdal (citing a story in the Onion, of all places) pleads, hey, come on, pay attention, this is really important!
1982 is a long time ago
As Fortune CEO Alan Murray points out, the last time inflation was this high was 1982. Back then, he was covering the thrilling business of the Federal Reserve under the guidance of the famously obscure Paul Volcker, who once told him (in response to insistent questioning) “We did what we did, we didn’t do what we didn’t do, and the result was what happened.”)
The first thing to realize is that this is not a temporary aberration that is going to let up any time soon, as the current Fed Chairman Jerome Powell seems to be acknowledging. What happens when anything hangs around for a while – a pandemic, a conflict, high interest rates – is that human beings adapt and it becomes incorporated into our new baseline expectations. Unfortunately, that can exacerbate the very thing we might be trying to combat.
As Ram Charan and Geoff Colvin point out in a great Fortune article, inflationary cycles tend to be self-reinforcing. Companies raise prices, things get more expensive, workers demand higher pay, and it all feeds on itself.
Demand for higher wages, without much to show for those who get them
Labor was already asserting its muscle (a tiny bit) before the advent of the current inflationary period. Even iconic companies like Apple, Amazon and Starbucks are facing a push from workers for better pay, more security and better working conditions. Though hard-fought, these increases in worker well-being will not produce better living standards if everyday prices eat up the gains. For those on truly fixed incomes, inflation is a nightmare as their purchasing power decreases and the prices of necessities increases.
Companies caught unprepared are likely to lay off staff
As I’ve written about before, the investment drunkenness that led to so many over-valued unicorns looking for breakneck growth at all costs is beginning to give way to a period of greater sobriety. Now, even well run companies, such as the makeup icon Revlon, are going to be caught up in a vicious cycle of supply chain disruptions, unpredictable demand and cash crunches.
The first to go are likely to be part-timers, contractors and consultants. But firms will also find they are going to exit entire operations if they can’t come up with the cash to sustain and grow them.
The good news is that if you have a good, steady, business, there will be great people who might not have found you all that attractive before, willing to take another look. Boring companies with solid balance sheets are going to start to look like the glamour girl at the party.
The “access to assets” economy will be challenged
With interest rates low, and the app economy making it financially feasible for many people to access assets without having to own anything themselves, we’ve gotten used to the idea that we can just borrow whatever we need on a variable cost basis. From earth-moving equipment to fractional shares of, well, just about anything, this idea has become embedded in how a modern economy works.
But hang on – when inflation is high, the cost of everything you might want to use on a per-use basis will go up. And guess what? The person who bought the thing – the car, the tractor, the ocean tanker – as long as they don’t have debt on it – is now going to call the shots. Want a Zipcar at a certain time? Get in line. Need to put something on a freighter? Better hope they like you.
A place where a clear case can be made for owning rather than accessing an asset is in car leases. If you’re leasing, buying the car is a good move. That’s because the price you’ll have to pay for it was set when your lease began – and it doesn’t adjust upward just because inflation has arrived. Buying makes sense even if you want to sell the car – after all, the car you’ll be selling will be priced 35% or more than the one you were leasing!
Cash will be king
We’ve gotten used to the idea that money is cheap. See comment regarding unicorns, above. To fight inflation, one side effect is that money for everything – your mortgage, your car, even potentially your layaway purchases – is going to get a lot more expensive, as the Fed raises interest rates.
You’ll start to see the reality of expensive cash popping up in places we aren’t necessarily expecting. Companies who may have gotten a little sloppy about collections are now going to get a lot more interested in getting paid on time. Companies that used not to care so much about terms are suddenly going to be offering a lot of love to their bean-counters and procurement departments.
Any variable rate loans (and yes, revolving credit card debt counts) will see interest rates rise. That is money that won’t be available for anything else and is likely to catch people by surprise. Oh, and public service announcement – that rate that you see on your credit card as a monthly rate? Get into the habit of multiplying it by 12.
Customers who pay slowly are likely to be cut loose, and customers with characteristics that companies suspect might land them in that category may not even be offered a commercial relationship at all.
Hoarding supplies is another common response (although it doesn’t always make sense). If something is going to be more expensive tomorrow, the logic goes, why not buy it today? Be careful of making this assumption with goods that are likely to decrease in value the older they are.
So what can you do?
Well, the first rule about getting into a hole is to stop digging. A recent article in Car and Driver reported that with supply chains as challenged as they are, 40% of anxious consumers were willing to pay $5,000 over the manufacturers’ suggested retail price for a new car. And as a Forbes observer noted, most buyers are going to be financing that purchase. This can cause them to inadvertently overspend the family budget. Even worse, they’re likely to encourage others to do the same, a kind of contagion effect. More people competing for more stuff = more inflation.
You’ll want to watch out for what some folks call “shrinkflation” in which firms offer you less but charge the same money for things. It was a super popular tactic in the 70’s and is baaaaaack. So read the labels. Look at the price per unit of whatever you’re purchasing. Go with store brands (I’m a big fan of Costco’s Kirkland brand) which tend to do this less.
This is as good a time as any to consider everything you’re currently spending money on. Consider taking a day to do some financial spring cleaning. Go through your credit card bill and make a note of any recurring payments you’ve probably forgotten about (streaming service? Auto-billed customer card from the drugstore? Recurring magazine payments?). All that stuff can really add up, and much of it may not be adding to your happiness and well being.
And finally, realize that inflation is not always a terrible thing. If you are paying off fixed debt, such as a mortgage, that debt got cheaper to retire.
The easiest thing to do in inflationary times is the one thing that many will find difficult. Don’t do much.
Meanwhile, at Valize
We had an all-hands retreat last week during which we laid out what we’re thinking about for the coming year. Our main conclusion is that we are all about helping organizations build the capabilities they need to create a brighter future for themselves. We want to be your partners in seeing you succeed. And we’ve got the right tools put together now, we think, to do that. You can kick-start a growth, innovation, or change project in as little as 60 days. We won’t do it for you, but we’ll teach you how to do it for yourself! And we back that up with software and on-line learning tools to make implementation easier and more likely to stick. Give us a shout if any of this sounds interesting on our web site at Valize.com. Use the contact form.