This is the economic trend of the year. The problem will be if it is the economic trend of next year too, and maybe the year after that.
Here are the drivers and the evidence:
- The price of everyday items in your supermarket. In the UK the Consumer Prices Index including Housing (CPIH) is 2.4% in the year to June 2021. But much of the increase has been in the last 6 months. I have seen reports in the US of everyday consumer items going up 5-10%
- Housing costs, especially for those buying property – we are in a housing boom. The UK housing market was described as being ‘on fire’ – by the Bank of England’s Chief Economist. The UK’s recent ’Stamp Duty holiday’ (a tax saving of possibly £15,000) encouraged people to move quickly. Numerous anecdotes are circulating about houses attracting offers well in excess of asking prices, and estate agents saying how busy they are (they would, wouldn’t they?).
- Transport costs, especially the price of petrol. For me this has gone from £1.05/litre to £1.31/litre over the last year. Fuel costs feature in the delivery of most physical products.
- Seaborne freight charges: the cost of shipping a container from say China to Europe has in some cases increased by a factor of 4.
- Car prices: in the US used car prices have increased by up to 45%, more typically 10% or so. Similar patterns are also seen in the UK, driven by (excuse the pun) people wanting their own car rather than use public transport while wearing a mask. Not helping is the fall in production of new cars as there is a shortage of electronic chips which enable so many automotive functions – electric windows, fuel injection, climate, cruise and so on.
- Logistics: the UK has a shortage of truck and van drivers, so supermarkets are paying qualified drivers a £1000 sign on bonus. Estimates from transport industry bodies have suggested the UK needs an additional 100,000 drivers, to cover some who have migrated back to Europe after Brexit, the ‘pingdemic’, and people not wishing to work so many anti-social hours.
- The underlying cause: too much money. Yes, really. In 2021 this is called Quantitative Easing (QE), in 1921 it was called printing money. Governments (especially UK, US and EU countries) have been borrowing to mitigate the economic effects of pandemic. Even my A level Economics recalls that MV=PT (see link below: Ted Wainman, I know you know this…) where essentially, too much money chases too few goods, so prices rise.
- Also on inflation – England & Wales ‘A’ Level results are at record high, as grades have been teacher assessed this year, not just based on exams. Maybe 40% of pupils have got an A or A* grade. But this is grade inflation, although an A Level in Economics plays a part in the rest of the story. Read on….
Why is this a problem? He is my very brief reasoning, some way short of the leading economic texts in this area, but easier to read:
- Rising prices mean your money buys fewer goods, which leads people to ask for higher wages to cover, which in turn leads to higher prices. In my banking days, I was told of an earlier period (early 1970s) when staff received two pay rises a year just so their income kept up with retail prices.
- Inflation is another example of compounding. A positive example of compounding is when you leave money in a bank which pays interest ( a novel concept in 2021) – if the interest is 2% after a year £100 will become £102, which after 2 years becomes £104.04. If interest rates are higher (in 1991 I had customers earning 14%) this becomes huge.
- With inflation compounding means an annual inflation rate of 5% will double prices in around 8 years.(if you would like a more academic and worrying article, try this: https://metinmediamath.wordpress.com/2013/11/11/inflation-how-long-does-it-take-for-prices-to-double/ )
- Should inflation rise higher, then you can head toward historic situations such as the Weimar Republic or Zimbabwe, or the current situation in Lebanon. Apparently, Beirut restaurants do not currently have prices on them as they change too frequently. Inflation in these situations is where the history is not just economic.
Why might this not be a problem? Again, my own brief reasoning:
- The Bank of England – an institution which does not get everything right but is full of people more intelligent than me – says this is temporary, and UK inflation should be back under 2% next year.
- The real value of debt diminishes with inflation. If you buy a house with a mortgage, inflation may increase the price (value) of your house, but the amount of your mortgage will remain the same – and decrease if you pay it back. If you are a government, inflation reduces the amount of government debt in real terms. Governments like this idea. But they only get the benefit if they stop borrowing more – which with a continuing pandemic, is not happening.
- One more reason this may not be an issue – it gives you an excuse to increase your prices. This is a really cynical view I know, but in times of inflation people get used to prices going up so object less when they do.
My conclusion: IF the Bank of England’s view turns out to be a correct prediction, we can probably shrug shoulders and move to the next issue. But should the start of 2022 still see rising prices as seen this year, and inflation is here for a while, your business strategy will need to flex.
Short term action: When did you last revise your prices?
https://www.ft.com/content/fc1fcb3a-090e-11de-b8b0-0000779fd2ac Hopefully the FT will let you read this for free.
Buzzwords of the Week – Liquidation
Definition – The process of selling a company’s assets to repay its outstanding creditors. Most frequently initiated by lenders/creditors, a company ceases trading when a liquidator is appointed, and their role is to sell – liquidate – the assets, and distribute the proceeds in a strict order (in UK law: other countries may differ) 1) the liquidator’s fees 2) fixed charge holders 3) preferential creditors (e.g. Tax, employees’ wages) 4) floating charge holders 5)Unsecured (trade) creditors 6)subordinated creditors 7) preference shareholders 8) ordinary shareholders. Anyone else – nothing.
Alternate View – The end of the business road. May be preceded by Administration (UK) or Chapter 11 (US). It is possible for a member’s winding up (liquidation) if the assets will cover all the liabilities, but sadly liquidation most commonly occurs when a company is insolvent and cannot meet its liabilities. Important to remember the order of payment if you are affected by the liquidation of a customer or supplier – hopefully, this is as close as you get to the liquidation itself.
Coming Up…
An Exciting Opportunity to Accelerate Your New Business Growth
The Challenge for Start Ups
- This year has seen a considerable number of people starting their own businesses having seen how working for someone else does not work for them.
- In the past, many of these start ups would begin with a product or service, start selling on an online platform like eBay, and find a way to get by.
- These start up new businesses would find themselves at the whim of bigger businesses and competitors with more marketing muscle. But spending their time working ‘in’ the business would mean they did not look at the big picture and consider their desired outcomes, and direction. A huge number fail within 12 months.
- This does not have to be the case.
- Using everyday technology matched with the human skills to create services people want and products you can help people buy, provides a more realistic chance of success in the 2020s.
Getting Better: Your Only Option
- Going self-employed remains a risk: so does staying employed.
- Ultimately the success of any start up business depends on the knowledge, skills, attitudes, and habits of the people involved: the opportunities, challenges and tools are available to all.
- Many ‘free’ support services are available, yet they may lack the experience of seasoned business people familiar with the challenges:
- The cost of starting up without the direction and skills you need may be considerable: many will give up.
- It does not have to be like that…
InGlued Start Up Academy
- You can Fastrack your start up success by developing and applying the skills successful business people use.
- The Academy is custom designed based on our experience as business people and our experience in training and coaching start ups to survive and grow.
- This training, coaching support and development is now available from Rob and Phil working in partnership with you.
- Inglued is a collaborative programme from Phil Ingle and Glued’s Rob Harrision
August 24th, 2021, 11:00 UK – Explanatory Webinar
- Register in advance for this meeting:
- https://www.eventbrite.co.uk/e/introduction-to-the-inglued-start-up-academy-registration-165724762225
- After registering, you will receive a confirmation email containing information about joining the meeting.
Want to talk to Phil Now
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HR Hot Topics is Friday 13th August at 1.00pm – when Peter Freeth & I with CIPD Coventry & Warwickshire will facilitate a discussion on the hottest HR issues. To join – it’s free – by signing up here https://www.eventbrite.co.uk/e/online-cipd-cov-warks-hr-hot-topics-networking-meeting-tickets-165742563469?aff=ebdsoporgprofile