There can be no doubt now that we are in for an inflationary period.  Quarterly inflation for the period ended 30 September 2021 is the highest for 10 years (see chart below) and the RBNZ Monetary Policy Committee (MPC)’s report of 24 November 2021 states that headline CPI inflation is expected to measure above 5% in the near term.

NZ Quarterly Inflation Graphic
NZ Quarterly Inflation Graphic

The MPC’s report attributes rising inflation to tightening capacity pressures in the economy and specifically cites employment as being above its maximum sustainable level.  The report also refers to higher oil prices, rising transport costs, and the impact of supply shortfalls as a consequence of global supply-chain disruptions.

Some economists might also argue that monetary and fiscal policy might also be contributing to inflationary forces, and there has certainly been a significant and rapid expansion in the RBNZ’s balance sheet (as shown in the chart below).

Graph of the NZ Central Bank  Balance Sheet 2012-21
Graph of the NZ Central Bank Balance Sheet 2012-21

Irrespective of the causes of inflation (and whether it will be “transitory” or longer-lasting), business people will need to focus on how to mitigate the effects of inflation on their businesses.

Typically, the business challenges associated with higher rates of inflation are as follows:

  • As the purchasing power of the currency decreases, customers become discouraged from buying goods and services in the same quantities as they used to. This impact can be particularly severe on businesses selling non-essential services and goods. Consumers will often choose to forego luxuries and minimise on the quantities of essential goods and services as a result of increased prices.
  • Currency held in bank accounts by both businesses and consumers loses its value day-by-day. This exacerbates the falling demand for goods and services as consumers typically feel “poorer”. It also reduces the value of the reserves that businesses hold to fund equipment replacements, new products and services, and to see them through unforeseen setbacks.
  • Business costs increase across a broad range:
    • As transport costs and the price of products and materials increase, so does the cost of replacing inventories.  It is obviously important to be increasing the selling prices of goods and services to at least a level that will fund the purchase of new inventories, but this is often difficult to do in an environment in which demand for goods and services is already falling due to the decreasing purchasing capacity of customers.
    • Rising costs of replacing inventories can be amplified for goods for which there are supply shortages, as competing businesses attempt to fulfil their requirements by bidding up the supply prices.Employee wage demands typically increase during periods of high inflation due to the increasing cost of living.  While this is quite understandable (and it is important to increase wages in order to maintain consumer demand), a lot of businesses will struggle to afford payroll increases because of decreasing revenue.
    • Borrowing costs typically increase along with inflation, as interest rates are increased to try to counter the increasing inflation rate.  At its November 2021, the Monetary Policy Committee increased the Official Cash Rate (OCR) to 0.75%.  The interest rates have already started to increase and it is only a matter of time until the increases flow through to the retail interest rates charged by banks and other lenders.

Of course, different businesses have different characteristics and different circumstances, so there is no single solution that will be best for all businesses (just as there is no financial advice that will be most suitable for everybody).

Members of The Alternative Board are in the fortunate position of being able to access the collective experience and knowledge of their fellow members, and then apply that knowledge and experience to making their own business decisions grounded in the knowledge of their own businesses and circumstances.

The Alternative Board - OwnersAuckland NorthInflation will be a significant business challenge in 2022
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