Let’s be clear, Inflationary trends within the borders of any country can be amongst its populace’s hardest times, consequently one of the major reasons certain economies collapse and sometimes even, the reason why some governments default on sovereign debt and other countries still, have been plunged into instability and struggle for years to recover. On the back of this one most popular ‘buzzword’ in economics, a myriad of politicians have won and lost elections, or even office, because of kept, or failed promises to combat spiking inflationary trends within their country’s borders. Inflation was even once in fact declared Public Enemy No. 1 in the United States by President Gerald Ford in 1974.
Yet, despite its obvious drawback, being the increase in the price of goods and services, plus making your savings in the bank less valuable than it previously was, inflation and its accompanying trends are not all so bad. In fact, economists believe that a strenuously and carefully managed level of inflation is good for any economy, and consequently for you and your business in both the short and long terms. This thus means, inflation, bad as the word and its connotations may sound, is not all doom and gloom as you might think, and should you know your way around finding the silver lining in a dark inflationary cloud then inflation might actually make you rich or even increase the value of your business.
So, for this article, we will be analyzing some of the trends that make inflation good for you and how you can use them to your advantage.
Now, let’s begin by understanding the basic layman terms of inflation. It is essentially, the increase in the price of goods and services when there is more cash chasing less of these goods and services over a given period. Some of the key causes of inflation are;
A Growing Economy: Yes, believe it or not, you and I are the principal inflation stimuli. A growing economy leads to growing employment rates and wage increases, which in itself, is a good thing, as more people find themselves with jobs and more money in their pocket, which they in turn spend not only on necessities but luxuries as well. This higher demand allows suppliers to increase prices to cover more operation costs, which in turn leads to more jobs, which puts more money in circulation, and round it goes again.
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So, if this alone causes inflation at a steady rate then so be it, let’s inflate the economy away! Unfortunately, this one, of many causes, is the only positive of an inflationary trend, and we shall soon see why. Next is,
Artificial Expansion of Money Supply: This means the physical printing of more money than an economy needs to run. Here, the same principle of demand and supply are applicable. With more money in circulation, people have so much money to buy things. They go on a spree thus bringing about skyrocketing prices but also, simultaneously, devaluing the nation’s currency to the point it holds little value. So, you may understand why the Zimbabwean dollar is now basically worthless. The country printed so much of it, for little to no reason, that its fundamental value as the national means of exchange, disappeared. Consequently, it is good to remember, money is worth whatever we believe is valuable enough to trade it for. This is why printing of more money than a nation needs is considered one of the most dangerous causes of inflation, and hyperinflation possible, and little reason countries hardly ever print money, rather they recycle and repair old bills.
Government Policies & Regulation: These in most cases come in the form of higher tariffs and taxes. The more government charges producers for manufacturing, or importers for importing their goods and services, the more these charges are in turn pushed back to you and I in the form of increased prices. This may not all be bad as a government can use higher taxes and tariffs to stem the undue importation of foreign goods in favour of local, case in point, is the tariff on foreign rice to bolster production and demand for local. The only challenge, however, is when local production and quality still do not match the expected local demand. This thus pushes demand, to a higher rate, for the ever-available foreign goods once again, still inflicting inflation.
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Government Policies and Regulations can thus be considered a double-edged sword in many ways, however, we shall discuss more of this in another article.
Bulging National Debt: It is unfortunate but well known today that many governments borrow to service their national budget and buy things their country needs, or in some cases do not need, to run. However, when national debt skyrockets to a point the government can no longer expediently pay out of its own coffers, it has two options. One is to raise tariffs within its borders to be able to meet its debtor obligations. And as earlier discussed, this rise in taxes ultimately gets pushed to you and I, who have to pay more, leading to inflation.
The government’s other option, of course, is to print more money. As explained earlier, this can be very harmful for any economy, which explains why governments keep raising taxes, particularly if they spend more than they make, and in some cases, with little to show for it. Printing more for any reason than to replace the old bills in circulation, makes any currency less valuable than it should be, and in many cases leads to hyperinflation. But more on that in another article. Next is,
Currency Devaluation: This is the artificial downward adjustment in a country’s currency exchange rate, resulting in an artificially caused lower value. This causes its exports to be less expensive, encouraging foreign nations to buy more of the devalued goods while making foreign products more expensive and encouraging citizens of the devaluing nation to rather consider domestic products over foreign imports.
For certain countries like China, despite the attendant inflation spike within their borders that came with this devaluation, it has helped to push more of their foreign exports into the global market thus creating jobs and growing their economy in leaps and bounds.
The same, unfortunately, cannot be said for Nigeria and there are several reasons for this. However, that deserves an entire article of its own, so we shall move on,
Weak Exchange Rate: The more a country’s currency is seen as valuable and a must-have to affect trade or business, particularly outside its borders, the higher in value it becomes. Consequently, the more money citizens of a country have to, and will gladly, dole out for foreign goods and services, the more expensive it becomes, this in turn leads to inflation, particularly in cases where a nation is more import-dependent than export. Less of the domestic currency is needed and more of the foreign to effect trade.
War: Yep, nothing causes or worsens inflation like war. The more conflict ravages a country or region, the less people and businesses wish to live or work there, astronomically driving up the price of whatever goods and services are available. This is made even worse when basic daily necessities are affected, as can be glimpsed from the war in Ukraine.
Crime: Just like war, businesses and people tend to shy from and do much less business with or in areas, and or countries where crime rates seem unrestrained. Seen as high-risk areas, businesses tend to charge people and other businesses who wish their goods and services much more than they would in climes considered less risky as they put the inherent risks to their lives and business investments into consideration.
Inflation: The Positives…
Although high inflation hurts an economy, deflation, or falling prices on the other hand, is not desirable either. When prices are falling, consumers tend to delay as long as they can before making purchases decision, anticipating further price drops in the future. For any economy this means less economic activity, less income generated by producers of goods and services, and thus lower economic growth. Japan is one country with a long period of nearly no economic growth, largely because of deflation. This in essence means that inflation stimulates economic growth by spurring consumption for the now than to put them off to a future date, perhaps, till never.
For you and your business, inflation, therefore, means as long as you offer needed goods and services, you can continue to produce knowing people will buy from you now instead of at a later date, and you can sell you goods and services at a higher price to cover your production cost whilst also willing to take certain business risks to further increase output. This then leads to…
Higher Profits since you can sell at a higher price.
Increased Production since you likewise receive more income to create more goods and services and even expand your operations. And Consequently…
More Employment and Better Income since increased production means an increased demand for the various factors of production, including manpower with greater work experience. Therefore…
Better Investment Returns because during inflation, investors and entrepreneurs receive added incentives for investing in productive activities, and increased costs passed on to the business customer. Therefore, they receive better returns. This is turn means…
Shareholders earn better income as companies earn higher profits, consequently increasing their value and dividend payouts.
Inflation also Benefits Borrowers of money more than lenders. During inflation, the purchasing power of money decreases. Therefore, if the borrower is paying a rate of interest which is less than inflation rate, he gains in the process. This is because the real value of the money that the borrower returns is actually less than that of the money borrowed. Essentially meaning, you’re really paying less to your lender during an inflationary uptick than you might actually know.
Thus, and as some economic pundits have put it, as long as you’re paying interest on a loan between 0–5% (Zero and Five Percent) above whatever the current inflation rate is, you are actually still benefitting from the loan more than the lender who is receiving it. Now, do you understand how the rich get richer? They always negotiate low-interest-bearing loans to work with.
Inflation: How to take advantage of it…
As an employee: Unfortunately, no one cadre of individuals feel the pitch of an inflation trend worse than the wage earner, thus, one of the most important things to remember is that as long as your earnings are fixed, inflation will eventually catch up with and consequently erode its purchasing power. Meaning that you will eventually buy less and less with the same wage and spend more for the same necessities and luxuries you are used to. Therefore, as long as you deem yourself an asset to the enterprise you work in, it is never a bad idea to request a salary review if you feel inflation biting too deep into your paycheck, unless you already work in a company that has periodic wage reviews as part of its policy or offers generous bonuses at some specific time in the year to cover for potential loss in your wage purchasing power. Otherwise, it may be time to dust up that CV…
Save less, invest more: Since we were children, we were taught how to save for a rainy day, and one place was a savings account. But, nothing erodes more into the buying power of your money when it is in the bank than inflation. Not even the standard bank charges take as much away from you as does inflation. Looking for a way to have your money match or surpass inflation outside the traditional savings account is a great way to ensure what little you own still packs a financial punch every time you make a purchasing decision.
Be smart with money: For many, this is easier said than done. But, you must always remember, your earnings, due to inflation, is now worth much less than it was not just last year, but even a month ago. You must consequently question every purchase decision and try to have as much liquidity on you, most importantly to invest it with, as you possibly can, especially if you are a single-income earner.
Try to expand your income potential: This ties back to investing. Particularly if you are an employee. Having your income stay above inflationary trends has been found to be a key factor in having a stable and happy work life since it has been proven time and again that less money and more bills adversely affect mental and physical health. Thus, if you are more merchant inclined than investor, you can reference an earlier article, 16 Recession Proof Businesses You Can Start Today 16 recession-proof businesses you should consider today – Nairametrics, and look for an inflation-proof side business you can start without taking your eyes off your primary source of income. Do not forget to ask for a raise though. You never know until you try…
As a business owner: Business owners have traditionally been one of the great positive benefactors of inflationary trends, and as already discussed, it is not difficult to see why – because opportunities always abound. Higher production or delivery costs, regardless of why or how they are caused, are always passed along to the consumer, eventually. This means higher profit potentials for businesses. However, Saving less and investing more is always the better way to ensure a flourishing business. Investing in better machinery, greater delivery channels and more experienced employees, ensures your company can easily weather any inflationary storm while keeping the best and most experienced hands to man the different helms that make your business what it is.
Unlike the employee however, companies must be even smarter with money. Watching the numbers ensures you understand exactly how much more to charge for your services and exactly how much profit is earned. For the small business particularly, this is key to profitability without losing one of your most important assets – your customers. Too high an extra charge, and you eventually lose your customers to the competition. Too low, and you lose your business altogether.
As already explained, loans are not bad, however, companies must always have some short-term cash call to be able to meet immediate needs such as salaries and third-party payment obligations. Thus, negotiating worthwhile interest rates that work in your favour and free up your immediate cash reserves, whilst employing received credit wisely, and or offering investors worthwhile incentives while still ensuring your company has enough to call its own is how many a profitable company over the years have stayed afloat.
Offering above-inflation rate returns to investors and stakeholders alike while only taking below inflation rate interest-bearing credit will always ensure you are hedged against the uncertainties of an inflation as you will have a strong backbone of happy investors to pay more to, customers to offer greater value and more importantly, loyal employees who will staunchly stand by your business in such times.
Not often spoken enough about however, is your business’s one true asset – your employees. Employee Wage reviews are a great way of staying ahead of the competition during inflation upticks as ensuring high retention rates guarantee not only do you keep the best and most experienced minds and hands, but critically, they do not end up in the hands of the competition.
Also, be on the lookout for mergers and acquisitions. Two good heads they say are better than one. The same goes for two good companies with robust balance sheets. Why be in competition if you can be partners? Merging forces with like or complementary companies has been one surefire strategy of weathering times of inflationary uncertainties and might just be something your business is sourly missing particularly in these times.
However, should you have a greater risk appetite then note that at no time is the true robustness of a company balance sheet tested as when the sweltering wave of inflation hits. Being on the lookout for companies that complement your business which have been weakened or become insolvent due to spiking production costs and poor management is another way of inorganically expanding your business and staying ahead of the uncertainty curve.
Remember, business opportunities abound at such times, but how well are you looking?
As an investor: During times of inflation, no one class of individuals truly benefit more than the astute investor as a myriad class of investment vehicles have been traditionally known to benefit immensely from, especially, high inflationary trends. For some investments in fact, the higher the rise in inflation, the more returns these portfolios have been known to make.
Real Estate: When prices go up, so do the cost of rent as does the value of most properties. Luckily, investing in real estate can come in many guises without having to directly own one. Being an agent or a flipster also gets you in on enjoying the rising costs of living, particularly in residential or commerce-dense areas without necessarily owning anything.
You can however explore the benefits of a REIT (Real Estate Investment Trust), without having to necessarily bother about anything more than dividend payouts and capital appreciation on your monies at the end of a given financial period since they also charge higher for properties they own or invest in and understandably funnel higher profit earnings to investors through the unit system.
Should you wish more bang for your buck but want a more direct involvement in real estate investment and with a trusted circle of friends and or business associates then an Investment Club offers just about the same benefits, if not more than the traditional REIT. Just be sure to reference an earlier article to understand if the club, its rule and membership regulations is a good fit for you, plus, inquiring to how well the Club’s portfolio of real estate investments have done against inflation over a period.
Company Shares: As is already stated, quite a few companies benefit from inflation as they too tend to charge consumers more for their goods and services to cover the rising cost of production and wages. This in turn reflects positively on their profit and loss account, thus making companies that can easily transfer costs and still maintain a healthy balance sheet quite valuable, intrinsically, during times of inflation. In certain cases, inflation leads to a correction in the price of certain company stock, particularly if they were priced so high in a deflated economic period or their profits were hard hit by inflation but not to a point they file for insolvency. Since inflation, or higher than normal inflation, has traditionally been known to be cyclical however, taking positions in such companies when prices are lowered and then waiting for the next price spike is investor knowledge 101.
Being an Equity or Angel investor in a Startup with great potential to do well when prices generally tend to go higher and can always easily pass on this cost to consumers is also one of many paths ordinary investors have been turned into multi-millionaires, if not, in fact, billionaires. Also referencing an earlier article very well guide you on markers to look for if investing in recession-proof businesses outside the NSE.
Thus, making money from the Stock Market or non–listed companies, especially during inflationary periods is one of the easiest ways of hedging your hard-earned monies against it. You must however have a basic understanding of financial numbers and ratios, reference here and here, and be on a keen lookout for companies that traditionally do well and reward their investors accordingly during such times or businesses looking to raise capital.
Greater ROI: The higher the inflation rate, the greater your potential as an investor to demand above–inflation rate returns from whatever portfolio you choose to invest in. Consequently, the more inflation recedes, the less you can demand or make.
Commodities: As already stated, nothing drives up the price of goods and services like war. The global inflation caused by the war in Ukraine has opened our eyes to how important certain commodities, particularly Agricultural, and Hydrocarbons really are in our everyday lives. The price of wheat has jumped astronomically since the war began, making people who took positions in the very early days of the war a hefty profit. The same goes for crude oil and natural gas.
Being able to catch a trend is next to impossible, however, certain commodities, particularly agricultural, and hydrocarbons have been known in the past to be the major drivers of inflation as a lack or abundance thereof continually affect pricing on a global scale. Therefore, connecting with a broker and being on the lookout for markers of when to invest or otherwise could yield great above inflation profits, without there necessarily having to be another war to forcefully stimulate prices.
Gold and Precious Metals: While they do not pay dividends or cash payouts as opposed to other asset classes, gold traditionally has been a good investment to hedge against inflation. It may not always be the perfect hedge against inflation, but Gold tends to hold steady value while the value of most other financial assets may drop due to the decline in purchasing power. In August 2018 gold sold for $1,077 per ounce; in March 2022 it had climbed to more than $2,000 an ounce.
Connecting with a broker who can show you the ropes and trading platforms to use should you wish to benefit from Precious Metals and then markers to look for before staking a claim is an investor best practice.
You may also wish to join an Investment Club or Mutual Fund with interests in Precious Metals if you do not have the financial capacity to go it yourself.
Pharmaceuticals: Since the beginning of time, good health and longevity have been a grave concern to mankind, but at no time is it even graver than in times of inflationary and economic uncertainty. Keeping up with strenuous daily activities whilst keeping an eye on bill payments and family, typically take a toll on people’s health and wellbeing. To this end, pharmaceuticals have traditionally enjoyed stellar performance during such periods, as occasioned by the COVID pandemic and big Pharma’s whose balance sheets were greatly bolstered directly or indirectly from the dreaded lockdown era.
As a business, keeping up with modern advances in the medical and pharmaceutical industry will put you on the right footing to take advantage of several situations in any economy. As an investor, you never really go wrong investing in medical or pharmaceutical start-ups or other more established enterprises in the field.
As a broker or commissioned salesperson, at no time are your services greater needed within such an industry as in times like these since physical and even emotional stress levels spike during economic price spikes and so do the demand for health products. Companies within the industry do consequently try to find more direct channels of gaining market share and are always willing to pay handsomely. However, note that with some companies working with commissioned sales personnel, usually require requisite certification.
Security: Sad as the tale may be to hear, it is without a doubt that crime rates rise in tandem with inflation and economic uncertainties. As the jobless fill the streets, so does the crime, and the strenuous need to safeguard our wealth, property, lives and business investments in varying ways.
However, as already been said, silver linings sometimes appear in the oddest of ways, particularly in inflationary times, and as with any business or investment opportunity, staying attuned to the times, understanding what to do, and more importantly, having the liquidity to invest could keep you afloat even when others are going under…
Brain Essien is a business consultant, with expertise in digital marketing, crowd funding, pitch decks and business plan/proposal formulation and design.