Inflation is defined by the rate at which the value of a currency is falling and, consequently, the general level of prices for goods and services is rising. Inflation is a natural occurrence in an economy, but inflation hedging can be used to offset the anticipated drop in a currency’s price, thus protecting the decreased purchasing power.
Inflation hedging can also help protect the value of an investment. Although certain investments may seem to provide a decent return, they can be sold at a loss when inflation is factored in.
What is inflation?
According to a National Federation of Independent Business survey, 22% of small business owners say that inflation is their most important problem.
Inflation occurs in the economy when the price of goods and services increases over many months, while the value of money decreases. In other words, it takes more money to buy less. The dollar loses its purchasing power, and what may have cost $100 a few months ago now might cost $110.
What drives inflation?
In economics, inflation is the rate of rising prices and the fall of purchasing value of money. Short-term causes of inflation can be when the demand temporarily surpasses the supply of goods and services. It can also be when supply is restricted but demand isn’t. For example, when gas prices rise due to oil refinery shutdowns, or slow production due to natural disasters.
Longer-term systemic price inflation is usually engineered by central banks like The Federal Reserve to stimulate the economy. For example, in the US, the average rate of inflation has been about 3.10%. This might not sound like a lot – but at that rate, prices double about every 20 years.
Top 6 strategies to inflation-proof your business
Here are the top 6 tips to consider when seeking protection from inflation.
Ensure Access to Cash
Small business owners should take steps to ensure that the company has access to cash, particularly in periods of crisis. Visiting a bank loan officer and understanding what’s required to obtain a loan is a good first step, as is opening a line of credit in advance to fund possible short-term cash-flow problems. Establishing a good relationship with a banker is always useful for a small business.
Look to TIPS
Treasury inflation-protected securities (TIPS) are a type of U.S. Treasury bond, designed to increase in value in order to keep pace with inflation. Because they’re backed by the U.S. federal government, they’re considered among the safest investments in the world.
Reduce consumption:
With increased spending visibility and the ability to isolate drivers, companies can tailor their approach to match the inflationary environment. For example, even if companies aren’t able to buy better due to supply chain and producer pricing pressures, they can make sure that they spend better.
Recalibrate and Clean Up the Portfolio
Companies have several ways to implement this option. They can bundle or unbundle existing products, either to create new value propositions or to expose customers to lower price points for the disaggregated goods and services they want to buy. They can draw on insights from behavioral economics to change price gaps in order to steer customers toward more profitable offerings.
Satisfy investors.
New pricing models often sacrifice the upfront revenue impact of big-ticket sales, but they generally make up for that with higher recurring revenue over a customer’s lifetime. Investors tend to find these revenue streams more attractive because they are predictable and because they spread risk over a wider basis of customers.
Streamline your business.
Streamlining your small business can involve anything from automating and improving processes to investing in business software, to installing new features in your business to help improve workflow.