How Inflation Affects Management Decisions

September 23, 2022

Effective business managers always have an eye on the bottom line. One of the most critical factors for industries to monitor is inflation. With a targeted 2% annual inflation rate, the current rate of 8.6% is packing a big punch on the overall economy and impacting businesses in a variety of ways. Here are some of the ways inflation affects business management and the decisions that are made at that level.

Rising Inflation’s Impact on Businesses

Inflation impacts businesses in both positive and negative ways. Here are some of the most common:

• Disruptions to supply chain
• Raw materials shortage
• Increased overhead costs
• Increased interest rates
• Increased Consumer Price Index (CPI)
• Decreased consumer spending
• Low Return on Investment (ROI)
• Increased employee wages
• Lowered cost of old debt
• Increased competition

Pricing Decisions for Increasing Inflation

One of the most extensive results of inflation is increased prices for goods and services. This leaves managers with a few decisions to help the business to survive and thrive in a time period of high inflation. One option involves increasing prices to match inflation to maintain profit margins and avoid being priced out. A second option is offering promotions or discounts to offset price increases on goods and services.

Making Decisions Based on Varied Inflation Impacts

Depending on the business and types of management, managers may face differing scenarios related to inflation. During times of inflation, businesses involved in luxury or leisure goods and services, such as travel or new cars, may suffer as people rein in their discretionary spending. Rising interest rates that characterize inflation can hurt businesses that need to borrow money. Some sectors that thrive during inflation periods include real estate, commodities, healthcare, energy, and consumer staples. Managers in those industries must face different types of decisions during times of inflation than those trying to salvage their business.

Harnessing the Positive Impacts of Inflation

Inflation is not all bad news. Business managers can look forward to some positive effects, including the following:

• Job creation rises due to increased demand
• Business efficiency increases in an effort to remain competitive
• Debt burdens decrease as inflation lowers the real value of debt
• Profit potential increases with pressure to raise prices for energy, labor, and materials that can be passed on to customers.
• Investment outlook improves as businesses take advantage of anticipated profit increases

Reacting to Expected Inflation

When management detects inflation on the horizon, they can take steps to minimize loss, including management and professional liability. Strategy-minded managers will find ways to hedge against inflation by protecting profit margins through pricing strategies, investing in durable materials to avoid frequent replacement, and purchasing tangible value assets that are projected for value increases, such as real estate or precious metals. ◼