Market Perspective

Inflation will put pressure on margins and supply chain costs, but there are ways you can ease the pain

20 December 2021
The C2FO Team
rising inflation rate chart

Costs are up, and margins are down. Here’s how inflation may be affecting your business and what can be done about it. 

Europe is being buffeted by an inflationary perfect storm.

Like the rest of the world, the region is experiencing a demand-side boom; consumers are spending more, manufacturers are trying to make more and governments are planning to build more infrastructure.

But in Europe, the Middle East and Africa, local influences are placing additional cost burdens on businesses and compressing their margins. Acute energy shortages, defiant central banks and Brexit are adding their own challenges.

Inflation is a measure of price rises in an economy and reflects an imbalance between the supply of goods and services and the people and companies that buy them; as supplies run low, the price of what’s left is bid up.

The key factor driving this inflationary cycle is the COVID-19 pandemic. After more than a year of living under restrictions when bars, restaurants, shops and services were shuttered, consumers have gone on a spending spree.

But the impact of the virus and other economic influences have created bottlenecks that are preventing those demands from being met. Supply chain disruptions are halting movements of finished goods and commodities, and a labour shortage is making it harder to fill the jobs needed to ease the choke points. 

The emergence of the omicron coronavirus variant reminds us that the world is still subject to a pandemic with the power to upend economies. As scientists strive to ascertain the dangers it poses, the Organisation for Economic Cooperation and Development has warned that omicron has the potential to exacerbate disruptions in supply chains.   

The result has been a surge in consumer price inflation — the cost of everyday goods, energy and raw materials — to levels not seen in many years. For businesses that’s bad news because those costs get passed on to them too, narrowing their margins or forcing them to raise the prices they charge customers.

market rates display

Energy prices fuelling price rises

Among the 19 nations that use the euro, inflation was 4.1% higher in October than it was the same month last year, up from 3.4% in September. In the UK, prices climbed 4.2%, the highest in a decade. In Turkey, however, they were a fifth higher than last year, the steepest leap since 2019.

The biggest driver of price increases in all three has been fuel and energy costs. They’ve surged as the sharp increase in consumer demand prompted businesses and industry to ramp up their power usage to run factories, shops and transportation.

This also comes at a time of geopolitical tension between Europe and energy-supplying countries such as Russia. The transition to greener energy has also played a part; in a year when wind speeds fell to 20-year lows, the UK generated less power from wind farms that usually supply a quarter of its energy needs.

Turkey UK chess pawns

Brexit and Turkey’s central bank aren’t helping

The UK has other forces working against it. Brexit removed the UK from the European Union and its Single Market, which enabled the unhindered flow of goods, services, capital and labour across the Channel.

That has intensified the labour crunch in the UK by preventing overseas workers from taking jobs that are needed to do tasks as varied as filling petrol pumps, butchering meat and harvesting crops. It’s also slowed the movement of trucks carrying goods and parts from the continent.  

Meanwhile, Turkey is suffering higher rates of inflation as huge amounts of government stimulus have put more money in the pockets of its citizens and businesses.

Central bank decisions on interest rates, which are currently at or near record lows, are also influencing costs. While the Bank of England is contemplating raising rates to suck money out of the financial system and bring down prices, its counterpart in the EU has no such plans, and policymakers in Turkey have actually lowered rates further.

That’s lowered the value of the euro and lira, which makes imports more expensive, something that will raise costs further for many firms located in those countries.  

invoice payment tablet

Early invoice payments can ease the pain 

With no immediate end to rising inflation in sight — and with the coronavirus still disrupting economies — the picture can look grim for businesses. Fortunately, there are ways to ease the pain.

An effective way of doing this is by locking in lower costs before they rise further. One potent way of doing this is by allowing suppliers to offer discounts in return for early payment of their invoices. The benefit of this is that savings are baked into a transaction that can ensure lower costs into the future. 

Early payment also puts cash into suppliers’ accounts before prices rise again – giving them greater immediate purchasing power. Timing transactions to suit their cash conversion cycles — the time it takes to convert inventory into cash — can further enhance the benefits to them.  

By enabling suppliers to extract the most value from their cash, you can help yourself avoid higher costs and the need to increase the prices you charge customers.   

 

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