Price inflation is now being felt by businesses and consumers. If left unchecked, this inflation will threaten your business’ profit margins and revenue growth.
Behavioral Economic Drivers Behind Inflation
Classic economics defines inflation through supply and demand. Supply has been curtailed due to the Covid crisis. Trillion-dollar federal deficits and practically zero interest rates are spiking consumer demand. The result is that suppliers are using price increases to allocate their limited production capabilities to buyers able to pay the higher price. From the Federal Reserve’s perspective, inflation will work its way out of our economy in a few months as suppliers succeed in returning their productions to pre-Covid levels. Supply will satisfy demand and prices will fall back to pre-Covid levels.
Behavioral economics adds an additional analysis to this classic economic inflation assessment. In this analysis, inflation is a result of societal and economic frictions and distortions tied to the Covid crisis and our country’s ongoing cultural divide. For example, behavioral economics attributes women exiting the workforce as a major factor driving inflation. Fewer female workers limits production growth creating the supply and demand imbalance that is driving up prices.
The result is a structural change in how women view employment. A lack of adequate childcare has driven them out of the job market. At the same time, the #metoo movement has raised awareness of issues surrounding workplace safety and respect. Double that raised expectation for women of color. The result is a structural change in production. And if left unchecked, this structural change will also limit women as consumers. Until women feel enabled to rejoin the workforce, our economy and your business will see higher prices.
Inflation Business Best Practices
Inflation, and its underlying behavioral economics, will redefine business best practices. Today’s most obvious impact is work associate recruiting. The knee jerk reaction involves businesses raising wages to recruit workers. But research shows that wages “satisfy” but do not motivate. To win the recruiting challenge a business must offer both a “satisfying” wage plus motivators like a work associate career path or, for millennials, building sustainability into their jobs. That is why there are growing examples of companies offering work associates a free college education as part of their recruitment and retention efforts.
Yet to emerge, but coming soon, will be pricing innovations that win customers in an inflationary economy. During inflation, the key market segmentation criteria is how a consumer’s income is changing in relationship to the pace of price increases. Consumers with incomes that are rising faster than inflation are now the high margin sales opportunity. Consumers with income slowing or falling in relation to price increases will require targeted marketing solutions if they are to be retained as customers.
The cultural war over immigration is also inflationary. It is currently impacting labor supplies in construction, food processing and hospitality. It holds the potential of impacting technology companies as the supply of highly educated immigrants is constrained by limiting visas and citizenship paths.
Childcare must be part of the business solution to inflation. Business has a role in breaking the “negative re-enforcing loop” where the more women stay out of the work force to care for their children the more all women face growing pressure to focus on childcare. This is a structural problem as evidenced by job reports showing that the overwhelming majority of new jobs are being filled by males, not females. A business and government collaboration is needed to break this negative re-enforcing loop by creating more childcare at work, through school re-openings and the jump starting of the small business childcare industry.
Today’s Inflation Opportunity
Inflation will drive customers and work associates toward innovating companies that deliver on competitive prices and values. Here are a few companies that started up during the inflationary 1970s: Southwest Airlines, FedEx, Microsoft, Genentech and Apple. All of these companies have in common the deployment of new business models and disruptive technologies that succeeded in winning customers on both price and values. Today, they are market share leaders and are recognized for their workplace cultures. That is your business challenge…and opportunity…in today’s emerging inflationary economy!