How to combat Stagflation

Stagflation is a combination of stagnant output and rapidly rising prices. It has been in the press a lot lately as financial analysts fear the toxic cocktail of rising prices and slow economic growth. Post-pandemic supply chain bottlenecks, combined with rising energy prices and the economic effects of the war in Ukraine are seen as the main contributors to the current economic challenges.

The rise in energy prices is already starting to impact the profit margins of businesses. There is also an intense shortage of human capital which is driving up the cost of hiring good people as firms compete to attract the best and brightest talent.

The cost of borrowing is also starting to increase as interest rates creep higher and higher. This will put businesses under increased financial pressure. The tone from economists in the financial services sector is cautious, with further interest rate increases expected later this year. Consumer confidence is falling somewhat and people are tightening their belts and spending less where they can.

All of the above combines to make the current trading environment very difficult for businesses. The best way for businesses to combat stagflation is to find ways to improve productivity. Investing in more efficient software or process improvements can help to streamline your business operations and increase productivity without hiring additional employees.

Businesses should also focus on bolstering their balance sheet. During a period of stagflation, revenue may flatline while costs keep going up. As such, businesses should prepare for tough times by minimizing debt and building cash reserves. Your firm should focus on cashflow. Chase down debts and tighten up your payment terms. It can also help to negotiate longer payment terms with your own suppliers.

Stagflation is a tough environment in which to operate any business. Costs rise and sales slow or even decline. Use it as an opportunity to review your current business model, make tough decisions and build your business into a stronger, leaner enterprise.

For advice and support during these challenging economic times, speak to your accountant.