From the average person’s viewpoint, inflation is watching the prices of everyday consumables like food, gasoline, and clothes steadily rise at least monthly and sometimes weekly. In fact, US citizens and residents have experienced the fastest price increases in 39 years – undoubtedly a shock to the wallet. However, many baby boomers who lived through Jimmy Carter’s presidency (the 1970s and early 1980s) will tell you that this time, inflation feels entirely different.
What are the differences?
A quick history lesson —
Then: Inflation in the 70s/80s
It was a case of four out of ten years of double-digit price hikes between 1973 and 1981, peaking out as 14.6% in 1980 and resulting in a nine-year average of just over 10%. There’s little doubt that severe erosion of buying power is a game-changer, especially when net incomes can’t keep pace. In a time of stagflation impacting life (i.e., no economic growth with staggering price increases), people, in general, come out of it poorer. So much so that it contributed to Carter losing the election for his second term.
Now: Inflation today
In contrast, we’ve faced, so far, only one year of price increases close to 7.1% (unadjusted) – probably going into a second year in 2022. Notably, it hasn’t broken the double-digit barrier yet, and there’s no indication that it has the legs to stretch out to 2025, let alone beyond 2030. However, the niggling questions remains: will things go from bad to worse, stay constant, or improve?
What’s causing inflation?
Here are the four fundamental fears the captains of industry are talking about:
1. The “wage-price spiral”
The “wage-price spiral” grabbed hold of US companies in the Carter era. Powerful labor unions were continually up against inadequate minimum wage levels and somewhat pitiful benefits for their members. So, they aggressively fought to enforce Cost of Living Adjustments (COLAs) in employee contracts, which staff leaders even in non-unionized entities latched on to. As a result, COLAs gained massive traction in commerce throughout the country, consistently inflicting shocks to companies’ overhead structures.
CEOs responded by raising prices, thus creating an accelerated inflationary momentum. Economists named it the “wage-price spiral.” In other words, prices went up by 10%, followed, in short order, by a reciprocal wage rise, which triggered another price jump; then hot on its heels – another wage rise. And so it went – on and on. It’s an eye-opener that the “wage-price spiral” – one of the significant challenges of the times – is not a powerful driver in the current economic scene. Why?
- Since 1980 union-controlled companies dropped from 24% to 12%, primarily operating in government and quasi-government sectors. The private sector reflects a paltry 7% union connection.
- Irrespective, employee power has led to vast improvements in minimum wages and benefits, thus sucking the air from COLA (or equivalent) mechanisms.
- Management, in general, is considerably wiser and more circumspect about inflationary pressures. They know they have to find innovative ways to deflect cost increases other than continuously lifting prices.
- CEOs have realized that:
- Employee contentment is the answer to retaining them.
- In turn, employee retention is a vital ROI energizer.
- They’re not going to let the recent price spikes upset the applecart by blindly letting prices bear the brunt of the problem.
CEOs have come to terms with the post-pandemic challenge facing us now, namely, The Great Resignation. The latter event is the prominent force behind rising wages, primarily because people retreated from the workforce to contemplate their next move.
The bottom line is that businesses in the enterprise and SMB categories face the nationwide impact of record unfulfilled job openings, alongside only a slow trickle of workers to occupy these spaces. Still, wage hikes are around 4% – approximately 65% of the inflation rate and unlikely to translate into higher prices.
2. Oil Prices
Let’s get a good perspective of rising oil prices and put them in their right box. When economists compare total energy consumption to gross domestic product, it’s pretty startling that in 2021 we are consuming: *
- Only 30% of 1970 energy levels.
- And less than half (44%) versus 1980.
*Based on the energy per inflation-adjusted dollar of economic activity
From another angle, many people miss the point that the “services” a brand offers plays a far more significant role than ever before. Consequently, it’s another confirmation that products substantially lessen their dependence on oil today (versus the late twentieth century). As a result:
- It’s not a train wreck, notwithstanding that oil and gas prices (currently hovering around $100 a barrel) could stay or climb even higher in 2022.
- The supply chain (which we deal with below) has already baked oil inflation into its prices.
- Instead of fretting about price pressures, stakeholders’ focus on channeling and receiving services and goods in the most value-centric manner.
3. Global competition and the supply chain
Another significant difference when CEOs review the latest inflation event is that global competitiveness in the 1970s and 1980s wasn’t a fraction of today’s situation. The supply chain is dependent on products flowing in from China, Mexico, Canada, Vietnam, Korea, Taiwan, and all over Europe, competing aggressively against domestic manufacturers. So, there’s a consciousness that higher prices are not the answer to softening the blow without considering international supplier reaction.
In fact, the recent supply chain glitch that has spiraled container prices and warehousing costs is a worldwide thing. Based on that, CEOs agree:
- It’s one of the principal drivers behind the 7.1% US inflation in 2021, thus creating concern across all industries and political circles.
- Leaders can quickly deflate price rises with cohesive strategies focusing on returning to pre-Covid market conditions.
Let’s go to the fountainhead to appreciate where the most prolific inflationary source lies and visualize how it can end. First, we’re talking about China – the primary global provider of manufactured goods, currently dealing with severe ripple effect issues. To a lesser extent, add energy disruptions to the list, exacerbated by the Ukraine war, and there’s a toxic cocktail of economic disorders on boardroom tables in every US state.
It’s not all doom and gloom – far from it. Shoppers’ insatiable demand, kicking in with a remarkable post-pandemic economic recovery, highlights every crack in the fabric as marketers try to find ways to cope with bursting marketplaces.
4. Overall employer experience (EX) and customer experience (CX)
EX: As we can see above, the workforce is in a relatively good place, picking and choosing jobs that pay well and, more crucially, suit their lifestyles. As a viable employment option, remote working is here to stay and sometimes overrides better pay considerations. As described above, wage pressure is absolutely in the mix but is not the primary inflationary driver.
Indeed, even with the Great Resignation in full swing, corporate earnings are tracking upward, and stock price levels break new highs regularly. In short, management isn’t resisting the salary shift and employees’ demand for extra benefits. Therefore, as jobs refill with improved lifestyle balance, the employee churn rate should lessen significantly.
CX: It boils down to measures that address global trade channel tensions connected to logistics networks. Let’s make no mistake: We haven’t seen supply shortages like this in ten years, so it’s a concerning situation. As long as it exists, inflationary pressure won’t diminish, but all signs point to it having peaked at the end of 2021. Things are getting better.
CEOs and executives leading businesses out of the quagmire have derived innovative initiatives to improve the CX as follows:
- Enterprises have invested considerable capital in bringing the supply chains in-house with vertical integration strategies. In other words, they’re exploring every possibility of lessening dependence on non-US supply options.
- There’s a trend amongst mid-sized retailers to acquire logistic entities, thus smoothing out the supply chain. Soon affordable, same-day delivery will be available across numerous retail verticals, not only from Walmart and Amazon.
- Companies are strategically creating the management bandwidth to carve out new channels and supply solutions, rejecting pricing as a safety valve.
- They’ve managed to hold margins in check without upsetting the customer bandwagon by initiating production initiatives with profound ramifications:
- Staying agile and rerouting goods whenever clogged ports looked close to becoming a stubborn obstruction.
- Using air transportation wherever possible, especially in high ticket items where the extra freight charges weren’t a deal-breaker.
- Looking at packaging alternatives, product manipulations, merchandising displays, and online collaboration wherever they could release pricing pressure without impacting brand loyalty.
We should be encouraged by business leaders’ versatility, resilience, and innovativeness. It’s apparent in every industry facing inflationary pressures. It’s impressive and ushers in a new era of intelligent management leading the way for future generations and Sogolytics is at the cutting edge of these initiatives. We help you gain the insights you need to make strategic decisions, maximizing impact. Reach out to our team of experts and discover how we can add value to your business, better preparing your strategy moving forward.