As we celebrate hearing the word “pandemic” less frequently, we face its replacement: inflation.
Second only to “supply chain,” inflation is impacting the cost of fuel, food, and federal interest rates. It is also changing the cost of assignments as employers pay higher fees for relocation support services and employees face decreased availability and higher prices for almost everything needed when arriving in a new location.
This three-part series will look closely at inflation, how companies manage it, and its impact on talent mobility.
What exactly is inflation?
The most straightforward explanation is that inflation is the loss of purchasing power due to a price increase over time. According to the Consumer Price Index (CPI) provided by the Singapore Department of Statistics, which tracks the prices of a basket of goods over time, the overall percentage change year-over-year as of August was an increase of 7.5%. Using their inflation calculator to find an example of price change in dollars, a cup of coffee that was SGD5.00 in 2018 would cost SGD5.25 in 2021 (the latest date used in the calculator). In brief, today, consumers pay more than they did four years ago for the same item.
Inflation is not inherently wrong. There is such a thing as healthy inflation, where supply and demand balance better than today. Economists consider a healthy inflation rate to be around 2%. The Asian Development Bank raised Asia’s regional inflation forecast for 2022 to 4.5% from 3.7%. It also increased its projection for 2023 inflation in the region from 3.1% to 4%, primarily due to higher energy and food prices.
What causes inflation?
Inflation occurs when demand exceeds supply. Recent and ongoing disruptions to supply chains resulting from the pandemic have placed a spotlight on the availability of goods and services. For an example of the impact of demand on pricing, consider how Uber uses surge pricing or higher pricing when demand for its services is greatest. That isn’t the perfect example because, in the mobility industry, many contracts have multi-year terms, insulating companies from surge pricing while also placing partners in the position of bearing the initial brunt of fast-paced increased costs. We are still in the midst of supply shortages across many services and products necessary for relocations, and it could take another year or two for a full recovery.
But, there is a second and less visible cause of inflation, which is when the components necessary to deliver a good or service increase in cost, thereby driving up the final cost of what we buy. Think about chicken, a staple meat in many countries. Chickens eat grain, need tending, and must be shipped and packaged for sale. Corn prices are at a 9-year high, there is a talent shortage, and trucking and ocean shipping rates have during this year soared with a 12-month increase that is the largest on record. With increased costs to get chicken on grocery shelves, chicken producers have little option but to either absorb the additional costs or pass them along to consumers.
Much of the readily available news about inflation is about how it impacts consumers. For example, it costs more to buy groceries, it costs more for aircon at home, and obtaining a car is more challenging and expensive. Those price increases are, in some parts, the result of companies raising prices to offset the increased costs they face for goods and services necessary to produce the products consumers want.
In Part II, we will look more closely at the impact of inflation on businesses and the standard tools used to address it.