Inflation hikes: What’s causing it and how to protect your business

Eurozone inflation rose to 5.6% in December 2021 and 5.8% in February 2022, setting repeated new record highs since the single currency was created some two decades ago. As it has historically, war is once again disrupting supply, boosting military spending, and threatening to sustain rising prices around the world meaning doubts are now raised over how quickly price pressures will ease this year, so for employers looking to retain their business at the standard it’s at now – what is there to do?

According to the latest figures from the Central Statistics Office, the annual rate of inflation rose to 5.6% in February, its highest level since June 2001. The chief culprit for the hike? Energy prices; electricity, gas and other fuels are up 29% on an annual basis. Price comparison website Bonkers.ie said the price hikes could increase annual household and workplace energy bills by as much as €1,300, with transport costs also being driven by higher airfares, which have risen by 65%.

So, what’s causing the increase?

Following the global economy’s reopening after COVID-19’s lockdown, companies have struggled to keep up with a surge in consumer demand. Supply chain problems, staff shortages and rapid demand for oil and gas have all driven up prices. As well as that, the global pandemic halted the growth in developing sustainable energy sources in Europe, the end of pandemic support schemes and Brexit have also played a part.

In March 2022, petrol prices jumped to the highest ever recorded (up 70c a litre from January 2021) while the cost of rent also shot up 8%. And the food and drink industry warned that the soaring cost of raw materials and ingredients was having an enormous impact on consumer prices.

Shortages of many items including building materials and computer chips only made this worse. And the lack of shipping containers and lorry drivers has made it more difficult and more expensive for businesses to get hold of goods – leading them to hike up their prices to meet the demand.

Furthermore, Russia’s invasion of Ukraine tilts the balance of global political and economic forces toward higher inflation. From the Russian Revolution to Vietnam, war has been a reliable precursor to inflation – this happens for three reasons:

1. Prioritising military needs over civilian demand strains the economy’s productive capacity, especially when that capacity has been damaged by bombs.
2. Supply chains are disrupted by embargoes, sanctions and fighting.
3. Governments often finance war by printing money or keeping interest rates too low. So whether the immediate burst of inflation precipitated by Russia’s attack persists depends crucially on whether the Federal Reserve and other central banks have the means and inclination to push inflation back down.

How is that affecting employees?

It’s tricky. Rising inflation rates, among many other factors brought on by the pandemic, have led workers to re-evaluate their current situation. Right now, it’s an employees market. There are more job openings than there are people to fill them. With the rise in the cost of living, workers know they can go out into the market to find other opportunities that would help better their situation and offset some of the personal living expenses that have increased in recent months.

Agile employers are letting employees manage their own time, making allowances for school pick-ups as an example and by and large, this seems to be working well.

The war in Ukraine has also aggravated a shortage of natural gas that has already sent inflation up sharply in the EU. The bloc is now contemplating a sweeping and costly restructuring of its entire energy system to exclude Russian natural gas altogether, with higher military spending potentially also adding to inflationary pressure for the individual.

What options do employers have?

Hiring companies are getting creative when it comes to rising inflation levels yet still keeping money in their pockets. KPMG revisited its benefits offering for 2022, reducing employee healthcare premiums by 10% in 2022, with no change in benefit levels. Other employers are turning to a tried and true strategy when addressing rising inflation rates: compensation changes, including bonuses and salary increases. Employers may also want to consider investing in benefits like mortgage assistance, childcare subsidies or fertility benefits – offerings that can directly help employees financially.

Hybrid working

Flexibility and remote work is also a popular option when it comes to managing the rising cost of living. Employees can be more in control of moving away from expensive cities, cut down on commuting, save money in the face of fuel hikes, move home to save for a deposit on a house and no longer have to commit to buying work clothes for work lunches.

Knock-on effects for my business?

The vast majority of businesses have been put out by the situation, with the most common issues affecting them being: increased costs of materials and stock, which can then take 3-6 months to arrive, increased shipping costs, with some containers costing up to three times what they used to and increased employee costs, with inflation also applying to wages.

These issues can then have a huge knock-on effect, with delays often leading to missed contracts, overly-stretched cash flow and difficulties finding new, affordable suppliers.

What can I do to protect my business from inflation?

Thankfully, lots of things. Here are five measures we suggest:

1. If you can, plan ahead and buy in bulk

Inflation is inherently unpredictable, meaning it could be useful to have a plan in place for any increases. Checking your cash flow regularly can help you to adapt quickly to rising prices, as well as purchasing what you need in bulk. This may help your business to avoid delays as your goods will come in one delivery – and also gives you the chance to negotiate better prices with suppliers.

2. Revisit your pricing

For small businesses especially, raising prices can lead to a dip in customers. Instead, try selling different products with higher profit margins. Or perhaps get creative by cutting the price of a best-seller to draw in more customers who may then purchase other items.

3. Reduce overheads wherever possible

Streamlining, like adopting Lean Business strategies, is key in the world we live in. Reviewing your business processes to decipher weak spots, assessing processes and reviewing your production and packaging costs are all effective when it comes to saving your business much-needed money.

4. Retain loyal customers

According to Forbes, attracting new customers can cost up to five times more than retaining a loyal one. So, look after your customers and keep them coming back by asking them what they like about the business and what it would take them not to head elsewhere.

5. Consider a flexible business loan

A fast and affordable loan is a great way to strengthen your cash flow or cover any bulk or increased costs. But remember to always assess your finances carefully and make sure you organise any finance in good time – so you’re ready to tackle any problems as soon as they arise.

Financial advisor to the Irish community pharmacy sector, food & beverage, SME and retail.

Back in the eighties, Fitzgerald Power saw an opportunity to do things a little differently. To be better. We’ve spent more than thirty years being better, offering our expertise in a wide range of sectors. If you’re looking for advice from some of the very best accountants in Ireland, we’re here to help. No two cases are the same, and we like to focus on getting to know our clients, so that we can tailor our services to meet your specific needs.

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