Stagflation is a word that sends shivers down the spines of economists. It is a combination of two words: stag, which refers to stagnation, and inflation, which refers to rising prices. When combined, these words suggest that the economy will stagnate while also facing rising prices – a double whammy. Stagflation is uncommon and has only occurred in small periods during recessions. However, recent economic conditions show some similarities to stagflation. These similarities have many businesses worrying about the future of their business and the overall economy as a result of stagflation. Here’s why your business should be worried about stagflation and what you can do about it.
What is Stagflation?
Stagflation refers to the combination of stagnant economic growth and a rise in inflation. Stagnation can either mean slow economic growth or no economic growth at all. Typically, it refers to economic growth that is slow. Inflation refers to the rising price of goods and services. When these two things happen at the same time, businesses and individuals see their purchasing power decrease. They are also faced with rising prices – making it even harder to grow their business. Typically, stagflation is associated with a period of economic slowdown or recession when demand is low. During this time, Central Banks may increase interest rates in an attempt to combat inflation however this causes businesses and consumers hold off on purchases, worried about the future, which in turn slows down the economy – a toxic paradox!
The Effects of Stagflation on Businesses
Stagflation can be a nightmare for businesses. Consumers are faced with rising prices and lower purchasing power. This makes it difficult for them to purchase your product or service, which hurts your business. Because the economy is slowing down, businesses generally have to find ways to cut costs. They typically do this by laying off workers, outsourcing manufacturing, and reducing benefits, such as healthcare and paid time off. This can hurt employees who depend on these benefits and wages to support themselves and their families.
Strategies to Survive and Thrive During Stagflation
If your business is worried about the impacts of stagflation, there are a few strategies you can use to stay afloat. These strategies include
- improving productivity
- strengthen balance sheet
- reducing your supply chain risk
- improving your customer experience
- reduce overheads
Businesses can combat stagflation by finding ways to improve productivity. Investing in more efficient software, modern plant and equipment or process improvements can help streamline your business operations and increase productivity without hiring additional employees.
During a period of stagflation, costs will continue to rise even as revenue stagnates. To prepare for these difficult times, your business should minimise its debt and build cash reserves – explore opportunities to consolidate or re negotiate mortgages and loans. Your company should concentrate on cash flow, collect debts, and tighten up payment terms. Your suppliers may also be willing to accept extended payment periods in return for guaranteed business.
You can reduce your supply chain risk by improving your supplier relationships. You can also reduce your risk by diversifying your sourcing channels.
Continue to improve your customer experience by listening to what they want and understanding their needs. Keep innovating and differentiating from your competitors and ensure your customers are fully aware of your Unique Selling Propositions (USPs).
Finally review your overheads in detail. ‘Nice to haves’ may have to go for a period of time in order to protect the business and people’s jobs. Service contracts coming up for renewal may need to be cancelled or adjusted in way which will reduce short term costs.
Stagflation is a scary word that represents a bleak economic situation. It is something that has only happened in small periods of time and has not happened since the 1970s. However, many economists have noted that recent economic conditions and circumstances are similar to those that occurred during the stagflation of the 1970s. If your business is worried about stagflation then consider the strategies outlined above or contact us to find out how Stepchange Business Growth can help.