For CEOs, CCOs, CFOs & Pricing Directors
So where to start with inflation handling? Well, we’re currently facing some of the highest inflation rates ever. In March 2022, the US inflation rate was at 8.5%, while the Consumer Price Index was at 287.71. The UK itself saw inflation rates of 7.0%, and the Eurozone itself is hovering around 7.5%.
It’s a global issue that’s happening here. This has had an impact on the overall price of goods and purchasing power that people have. Many sectors are affected. However the retail sector is affected the most due to the higher price sensitivity associated with retail.
We’ve seen staple items such as groceries and clothing go up month over month. Not to mention pretty much everything else, from rent to our utilities. So, how retailers handle the remainder of the year will be critical to their survival. Also for those consumers who depend on these goods.
How did we get such high inflation?
Several factors played a part that led to our existing situation. First, we have had relatively lax monetary policies since the real estate crash back in 2008. Interest rates have been at record lows, and every time there’s been an attempt to increase those rates, the economy backlashed.
This trifecta of low rates, high spend rates, and lack of supply led to the inflation we’re seeing today.
Then the perfect storm occurred over the past two years. This was the pandemic and its effect on global supply chains. While spending continued to increase with the new normal, and people were working remotely and still consuming, the prices of items started to grow from that perspective.
As the scarcity of items occurred globally through the disconnected supply chains, the demand for goods started to outpace the supply of goods. As the pandemic begins to fade, the need for these goods seems to have increased. This raises the demand even further and thus pushes up the prices.
This trifecta of low rates, high spend rates, and lack of supply led to the inflation we’re seeing today. There were some ancillary culprits, such as the economic relief provided several times and the postponement of major bills for a certain amount of time. These include student loan repayments and, in rare cases, rental payments.
How long will this inflation last for?
The US and other countries that are feeling the higher inflation rates can really only do one thing to help, which is to raise interest rates. It’s also the best solution because it starts to make money more expensive (whether borrowing or spending). Yet we cannot raise the interest rates too high too quickly. It could shock the economy overnight and actually could push us towards an unwarranted recession.
It’s about a slow and steady deployment of interest rates that take time for any real effect. Thus it will be some time before the inflation rates drop and may not do so quickly even in 2022.
How does inflation affect the retail sector?
Now, consumers’ purchasing power is relatively weaker than a year ago. This means that $100 buys a lot less now than it was able to before. They will now have to budget even further and make choices on their priorities for a household.
Consumers will still be spending the same dollar figure as before (or even higher) but with fewer goods to show for it. They now are in the phase of waiting for their purchasing power to come back and be able to spend correctly. Ultimately meaning they’re more frugal than before.
The inflation has gotten so high that the decision is not about whether to buy groceries versus articles of clothing. Still, it’s actually deciding inflation – retail prices handling on what groceries to buy and already stopping their spending on non-essentials.
Wholesalers Rising Prices
From the business perspective, wholesalers have had to raise their prices high. This is in order to keep their razor-thin margins by 11.2% from a year ago in the US alone. As a result, even a few of the most stable central European economies, such as Germany, are seeing staggering wholesale prices jump to 22.6% in March 2022. This is nearly a six per cent rise from the previous month alone.
This was helped by the surge in gas prices due to the current conflict in Ukraine, but many staples have been affected as well. For example, food prices alone have risen 2.4% in the US for things such as eggs, bread, and milk. The entire supply chain that supports the creation of these foods faces significant issues and is continuously pushing up the pricing.
So there’s only one direction for the near future where this will be going. The actual number of products sold will decrease over the coming months as retail sales are never adjusted for inflation. This means that we may see that retail sales are strong, but it’s critical to note what’s behind those figures and what to expect.
Eventually, as time goes by, the supply chain itself will head back to some level of stabilisation, and inventory levels will increase. This will, in effect, help to balance out the supply and demand curve. Then start to bring the price of all goods back down. In the process reverting back to a stronger level of purchasing power.
What inflation handling can be done by those in retail?
It’s critical to handle price management, as the margins have thinned between wholesalers to retailers. Retailers can only put the burden of higher prices on consumers so much before consumer demand starts to fall because the price has simply become too high.
Managing those margins and pricing manually will be too resourceintensive and not efficient or economical. By the time the pricing has changed, it may be time to shift those prices to the more effective one in retail. You need to consider dynamic and automatic pricing tools if you want to still have healthy margins. It will mean you won’t be growing a headache in inflation handling by trying to shift the prices by pennies every week.
Finding the right tools for inflation handling
This is where tools provided by Yieldigo need to be part of your retail technical solution sooner than later. Having an automated pricing tool that will shift the prices according to the parameters set in advance can be a great help. Easing the manually intensive pricing and keeping your margins healthy and consistent.
Having the suitable types of tools to help provide you with the data needed to make informed decisions will help you and your retail operations navigate this current high inflation scenario.
It’s not just about price automation here either, but also how those data points are delivered. You don’t want to manually update your prices on one system and then go to your eCommerce solution, push the prices there, and have it prone to user error. Yieldigo can be your omnichannel solution for all situations that will consistently deliver price changes across all your various consumer touchpoints and sales channels.
Analytical insights can help you track how your pricing strategy is working. You’ll be able to then formulate concrete KPIs in terms of margin, revenue, and price index to track your growth and progress. Moreover, you can test what-if scenarios to see what effects will any action have, for example raising your margins (based on simulation of customer behavior).
Additionally, you’re able to sustain the bare minimum margins if inflation continues to go up. Having the suitable types of tools to provide you with the data needed to make informed decisions will help you and your retail operations navigate this current high inflation scenario.