Inflection Inflation

This week, I’ve been out and about again, discussing, solutions for customers in financial difficulty. It was all very interesting.

Yet outside of the event itself, what struck me was how the price of everything has leapt up, there has been a step increase.

I mean, inflation has increased prices, it seems to have been permanently in the news for the last year and I have certainly seen it in the weekly shop. But, despite my grumbling at the time (and lots of grumbling when my motor insurance renewal came through), it was something that I accepted and, to a large extent, absorbed.

However sometimes, when you do something familiar, but a little less frequent.. it is then when you understand the cumulative nature, impact, and shock of the change. This is exactly what happened when I bought a quick sandwich for lunch at the station.

A packed lunch, the one that I used to get for six pounds, is now closer to ten.. a 60% increase (especially if I add a couple of those chocolatey treats).

It is a sharp increase from what I remember, and sadly one that I know is never really going to reverse; it is a new normal.

Jump around

We often think of inflation as gradual, rising at a steady pace of 1, 2, 3, 4, or 5% per year. What struck me is the reality of this is really quite different.

This did not feel gradual at all, prices jump around, and every so often they leap.

Businesses it seems, must have been absorbing some price increases for a long time. They have no doubt been finding efficiencies where they can, cutting corners (or product quality!) all to maintain margins.

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Eventually, there is after all only so much compromise that can be made. It becomes too much and with the cost of living being in the headlines, there is a valid reason to pass costs on. The opportunity is taken.

With the floodgates of bad news open, it’s time to rip the band-aid off and all the price increases flow through… at once. (sorry too many analogies there!). Unfortunately for us poor consumers, this often is a steep increase in cost, sometimes way above annualised inflation rates.

This allows for margins to be normalized, and hopefully product quality to be restored (although we will see on the latter).

It seems, in good times competition is a good driver and can keep costs down. However in harder times like these, through the magic of game theory, these same market dynamics can become a driver to enable above-inflation increases across the board.

Think of the poor consumer

All of this of course also has consequences for us consumers and our reaction to this is often mixed.

Short term, we can cut back on expenses, consume less, or find cheaper products. However, to keep things the same, longer term, incomes need to increase.

In case anyone has not noticed getting a pay increase, for most people, doing the same work is at best lagged, at worst it just hasn’t happened. So many of us are then left trying to find new ways to cope. Cutting back is fine, but longer term a more fundamental shift in the demand for goods occurs instead.

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Think back to some of the previous periods of high inflation, for example the 1970s, 80s, 90s, can we use this as a guide?

Back then the world seemed in the doldrums—nothing much to look forward to, stagnating and crumbling economies. Many products, those that seemed luxurious, lavish, and desirable at the time, simply eventually disappeared from the market (… monthly book club subscriptions, anyone, Leyland princess, or even the 3500?).

However little did we know at the time that our lives were also about to change for the better. The invention of the transistor, microchip, and later the computer all fundamentally changed our standard of living, bringing in extra income, jobs, and products (… hello Netflix, Telsa and certainly the sat nav).

So despite my grumbling over lunch, I was left wondering… Are we actually at a similar inflection point…. is this the start of a similar pattern… has another great shake-out begun?

Jump up

If true and this is the case, what we know is that looking back, trying to use what worked before or try to return to the ways things were is just not going to work… we cannot go back, and going forward things will be different.

Staying the same will be hard, however watching, listening to the next set of changes, and then adapting to those changes can really keep us ahead… (I should have been a PC game designer, back then… now I know!).

So if you can seize the opportunity, this could be the time to get in on the ground floor for something new. In the end, it could turn out to be something very positive.

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So Stay flexible, onwards and upwards I suppose.

Have a good weekend, everyone.

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