Tips for Thought

Monetary Tactics for Everyday Consumers and Small Businesses

The inflation rate in the United States for October 2023 is reported to be 3.67%, with the Consumer Price Index (CPI) peaking in June 2022 at above 9% and then gradually decreasing. The CPI in October 2023 was up by 7.7% year over year, and there’s cautious optimism regarding continuing this downward trend into the following year​​. Factors contributing to the high inflation rates include substantial government spending during the pandemic and the Federal Reserve’s flood of liquidity into the economy. The monetary supply surged 40% above its pre-pandemic level, and even after tightening, it remains 35% above the level of February 2020. This monetary stimulus came without a corresponding increase in the nation’s productive capacity. The labor supply had declined due to early retirements during the pandemic, childcare needs, and fear of the disease. Although it has recently improved, not sufficiently to return to pre-pandemic trends. Additionally, despite resolving many supply chain issues, high oil prices due to the Ukraine-Russian war and OPEC+ supply limitations continue to impact inflation. These factors contribute to the cost of deliveries, affecting the prices of even non-energy products​​.

On a positive note, inflation has decreased for six consecutive months up to the point of data collection, indicative of the effectiveness of the Federal Reserve’s aggressive interest rate-raising approach​. The underlying U.S. inflation moderated in August 2023, with the annual rise in prices excluding food and energy falling below 4.0% for the first time in over two years. The Consumer Price Index for All Urban Consumers increased by 0.6% in August 2023, and the index for all items, excluding food and energy, rose by 0.3% in the same month​​.

The measures taken to control inflation are seemingly working, albeit cautiously, as the Federal Reserve and other stakeholders monitor various indices and economic trends to ensure the sustainability of these measures. Nonetheless, business leaders and stakeholders must remain vigilant and consider contingency planning to navigate the evolving economic landscape​​.

What are actionable tips to weather the storm of high inflation?

Consumers and businesses must adopt robust strategies to safeguard their financial stability in the face of fluctuating inflation rates.

For Consumers

1. Budgeting and Saving:

  • Re-evaluate your budget to accommodate the higher prices of goods and services.
  • Prioritize essential expenses and consider postponing non-essential purchases.
  • Utilize budgeting tools or apps to track your spending and save diligently.

2. Smart Shopping:

  • Look for discounts, use coupons, and consider purchasing store brands instead of name brands.
  • Buy in bulk where possible, but ensure the items won’t go to waste.
  • Consider shopping from stores that offer cash back or rewards programs.

3. Invest Wisely:

  • Explore investment options that do well during inflationary periods, like commodities or real estate.
  • Diversify your investments to mitigate risks associated with inflation.

4. Reducing Energy Costs:

  • Implement energy-saving measures at home such as using LED lights, insulating your home, and using energy-efficient appliances to combat rising energy costs.

For Businesses

1. Cost Management:

  • Scrutinize supply chains and explore alternative suppliers to reduce costs.
  • Implement energy-saving measures within your operations to lower utility bills.

2. Pricing Strategies:

  • Re-evaluate pricing strategies considering your consumers’ purchasing power and the cost of goods.
  • Explore dynamic pricing models that allow flexibility in response to market changes.

3. Technological Investments:

  • Invest in technology to improve operational efficiencies and reduce manual labor costs.
  • Explore automation and artificial intelligence to streamline processes and improve productivity.

4. Employee Training and Retention:

  • Invest in employee training to improve efficiency and productivity, which can help mitigate inflation’s impacts on operational costs.
  • Consider flexible work arrangements to retain staff and reduce overhead costs.

5. Customer Loyalty Programs:

  • Offer loyalty programs to retain customers and encourage repeat business which can help maintain a steady revenue stream even during tough economic times.

6. Engage in Long-Term Planning:

  • Monitor economic indicators and engage in long-term financial planning to prepare for future inflationary trends.
  • Explore partnerships and collaborations to leverage resources and mitigate the financial impact of inflation.

What are examples on how a consumer and a business can manage this?

A Consumer

Meet Emma, a 32-year-old educator living in Chicago. With the cost of living on the rise due to inflation, she has revisited her financial strategy to ensure she stays within her budget. Emma has opted to use a budgeting app to track her daily expenses meticulously. To combat the rising food prices, she now shops at a local discount grocery store and buys in bulk, making use of coupons and discounts wherever possible. Emma has also joined a carpool group to share fuel costs, significantly reducing her monthly expenditure on gasoline. To safeguard her future, she’s also sought financial advice and diversified her investments, moving some of her savings into inflation-resistant assets like real estate.

A Business

On the flip side, consider the scenario of a small local bakery, “Sweet Treats,” in San Francisco. The owner, Laura, noticed a surge in the prices of raw materials and utilities. She decided to take a multi-faceted approach to mitigate the impacts of inflation on her business. First, she negotiated with her suppliers for better rates and explored alternative local suppliers who offered competitive prices. Laura also introduced a loyalty program to retain her existing customers and encourage repeat business. Moreover, she invested in energy-efficient appliances to reduce utility bills and implemented a dynamic pricing model that adjusts prices based on the cost of raw materials, ensuring the business remains profitable without alienating customers. Additionally, Laura initiated a partnership with a nearby coffee shop to share delivery services, reducing delivery costs for both establishments. Through these adaptive strategies, “Sweet Treats” continues to thrive despite the economic headwinds.

Takeaway

The pathway through high inflation demands prudent financial management and a proactive approach. By adapting to the changing economic environment through smart financial practices, both consumers and businesses can mitigate the adverse effects of inflation and foster financial resilience.

One book about inflation in the US We Need to Talk About Inflation: 14 Urgent Lessons from the Last 2000 Years by Stephen D. King. This book provides a comprehensive overview of inflation, from its causes to its consequences. King argues that inflation is a serious threat to economic stability and prosperity, and he calls for policymakers to take action to address it.