Even before the first reported case of COVID-19 in the country, the economy entered a prolonged downward spiral. What followed was a series of lockdowns worldwide, leading to businesses and factories closing shop, which only seemed to create a decrease in industrial production and an increase in currency production.
This made importing raw materials impossible, increasing manufacturing costs. It resulted in pandemic-related supply shortages hence an increase in the price of goods and services. The Bureau of Labor Statistics reports consumer price rose by an annual rate of 6.2% in October 2021.
The government’s efforts to resolve the issue through the stimulus and relief package didn’t bear fruits. World economies had shut down, creating supply chain shortages.
People resorted to buying all the available stock, fueling the current inflation rates, the highest it has ever been since November 1990. This piece examines four ways businesses can insulate themselves from the effects of inflation. But first…
Effects of high inflation rate on economy
Reduction in purchasing power
During periods of inflation, consumers cannot purchase the same amount of goods and services they used to with the same amount. The tremendous increase in prices forces them to either cut back on consumption or substitute for cheaper goods or services.
Increase in interest rates
With high inflation rates, interest rates follow suit due to the heightened investment risks. This increases the cost of borrowing and leads to an increase in the cost of production.
Creation of a feedback loop
Inflation can cause even more inflation of the currency. People tend to spend more to rid themselves of the depreciating currency. As this happens, the money supply becomes higher than the demand leading to a further reduction in its purchasing power.
Encourages spending
Although most effects of inflation are negative, one of the benefits of inflation is that it encourages spending. As mentioned earlier, you won’t want to stick with money that’s rapidly depreciating. Instead, the motivation is to buy goods that don’t lose value now rather than later.
Fortunately, there are measures you can take to protect your business against the impact of inflation on the economy.
Dealing with high inflation rate
Relocate cash
Since inflation reduces buying power, having large cash reserves is not a great idea. The best option is to diversify your investment into several assets that regularly outperform during inflationary periods. What that does is limit exposure of any one type of asset and shield your money from inflation.
You can choose to invest in stocks, bonds, investment accounts, and treasury inflation-protected securities (TIPS). Stocks, bonds, and investment accounts are typically good hedges for outpacing the inflation rate.
The TIPS principal increases with inflation and decreases with deflation, and on maturity, one gets the adjusted amount. You can also opt to invest in resources and equipment that will provide value to your investment and help further strengthen your company’s operations.
However, before deciding what to invest with your cash, you need to assess your business’ circumstances. Scrutinize the inflation rate and the rate of investment in bonds and investment accounts to gauge if it’s worth the risk.
Another good investment against inflation is commodities such as gold, crude oil, and natural gas. These barely lose value even when faced with recessionary forces. If anything, the price of gold increases during recessions.
Invest in real estate
Properties are unlikely to feel the effects of market changes; hence they are a good hedge against inflation.
That makes real estate an excellent industry to invest in since, over time, high inflation rates result in increased income for property owners as they can increase rent simultaneously.
You can also choose to own the property your business operates in to avoid the high rent charges because of inflation.
However, real estate is illiquid, which means that you will not access the funds in a financial emergency.
Fiat currency arbitrage
Some economies don’t face the same fluctuations, so a high inflation rate in the US will not affect the markets in these countries directly. These include Australia, South Korea, and Italy.
Diversifying your investments to these international financial havens secures them from the inflationary effects of a single market. Setting up your company abroad means it will operate normally even with high inflation rates locally.
Examples of such investments are foreign stocks & bonds, crypto currency, commodities [such as gold, silver, platinum, palladium].
Assess expenses
One of the most effective measures to protect your business from inflation is to cut costs. It’s a good business practice to minimize costs to minimize high production costs. Find ways to get raw materials at a cheaper price, and you can go as far as substituting your supplier.
Identify any areas you can make a saving and cut down those costs. You can also set up a contract with a fixed rate to avoid buying raw materials at a higher price in the future.
Bottom line
Inflation disrupts the economy and can adversely affect your business. As a business owner, it’s impossible to control inflation rates, but luckily, you can employ a few strategies to beat inflation.
Some of the best ways to deal with inflation include cutting costs, investing in relatively inflation-proof assets, and investing abroad. These strategies are a surefire way of protecting your business against the harmful effects of inflation.
