Inflation rates and rising prices aren't just headlines in the news; they can affect each and every one of us in ways we might not anticipate. Knowing how inflation changes and affects the world around us should be something everyone educates themselves on.
You don't need to be an economist, and you don't need to be able to track trends in interest rates, but a ground-level understanding of inflation can serve you well in your professional life, even if you typically go nowhere near buying and procurement.
What is inflation?
Inflation is defined as the rate at which the general price of goods and services increases, therefore leading to the purchasing power of money falling. In short, it is the fact that we need more money to buy the same things over time.
The UK government sets the Bank of England a target of keeping inflation rates at 2%. This standard is also used by many other central banks around the world.
When inflation goes significantly above this target of 2%, or if it fluctuates a lot and rises and drops quickly, businesses cannot set the right prices for their goods and services. Likewise, the public can't accurately plan their spending.
However, low inflation is not necessarily a good thing either. When inflation is too low or potentially even in the negative, people may not spend as they expect prices to fall and market conditions to improve. Low prices may sound ideal to many, but if no one is buying, then businesses begin to fail and jobs could be threatened.
Yes, many of us don't want to have to spend vast swathes of our disposable income on items that should be covered by necessary spending. However, a low inflation rate is simply not the answer. Understanding how inflation changes and putting that knowledge to use for ourselves is a much better path to follow.
How does inflation affect the world of business?
Inflation is not necessarily a bad thing, but it can have a negative impact. Inflation can positively affect a business if demand increases for a specific product or service they sell. The company will sell more, and their profit margins will increase. A company could be affected negatively if their industry becomes a high-inflation environment and they feel uncomfortable expanding the business in the current landscape.
Inflation can often be seen most keenly at the point of sale, but that doesn't mean that it won't have an effect elsewhere. Some of the most common ways inflation affects the world of business can include:
Commercial contracts
Commercial agreements can be affected by inflation, causing issues for businesses, suppliers, and lenders. Negotiators may work hard for a contract with a fixed-term payment agreement, only for shifting inflation rates to lead to price increases or other changes that lead to one party falling short.
For this reason, it is not uncommon for business partners to renegotiate their contracts regularly. Even if a supply chain has been set up for years, the parties involved may get together every year to rebargain and account for a price adjustment and other economic circumstances.
Supply contracts
Since inflation leads to higher prices for many goods and services, this then trickles down to the costs of raw materials, production, and operation. Negotiators may really have to flex their skills in order to get a good price.
As operational costs like energy and site management also continue to rise, businesses may have to keep a close eye on their spending and profits to ensure everything stays in good balance. Reviewing operating costs regularly and negotiating for cheaper commercial contracts can help keep costs down.
Salary negotiations
Businesses can often feel strings tightening during times of high inflation thanks to the payroll. Employees see the cost of living rising and, in turn, ask for a pay rise from their employer. Higher wages will then result in higher labour costs for the company.
Of course, this is something that every business should anticipate. Salary negotiations are an important phase of recruitment, and even the longest-standing employees may want to rethink their benefits package when times get tough. Whether you are asking for a pay rise yourself or are considering a request from an employee, you may want to consider ways you can add value that do not equate to numbers on a payslip, such as reworking a benefits package.
Collective bargaining
Collective bargaining is a powerful tool groups can use to fight against higher costs. If an entire group comes together with one unified voice, they can often achieve more than if they were acting as individuals.
This collective action is most commonly seen with trade unions. However, employees do not have to be part of a formal collective like a trade union in order to take advantage of a unified organisation. Just coming together as a group, with an elected leader or spokesperson, can have an impact.
Case study: The Royal Mail's 2022-23 pay dispute
Across 2022 and 2023, inflation in the UK was on the rise. It hit a 40-year high in October, sitting at 11%, and brought with it a cost of living crisis felt across multiple sectors. Royal Mail workers, represented by the Communication Workers Union (CWU), decided to enter negotiations with the Royal Mail Group over their pay and working conditions.
They had been offered a 2% pay rise, but the CWU argued that this was drastically out of step with the cost of living. Even though workers would be getting more money, cost increases in key essentials like groceries and energy bills meant that they were actually worse off and their wages were effectively falling.
Royal Mail responded that they would be unable to do so and offered a compromise of modernisation and automation to help sustain the demands for higher wages. Negotiations stalled, and 18 days of strike action were announced. These disrupted Christmas deliveries, one of Royal Mail's busiest times of the year.
A deal was eventually agreed in April 2023, bringing a 10% pay rise over three years, a one-off lump sum of £500, and changes to working practices. Though still below peak inflation rates, the offer represented a compromise under extreme economic pressure.
Negotiators can learn three key lessons from this example:
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Inflation radically shifts the value baseline: A pay rise can actually end up being a pay cut during times of high inflation.
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Economic conditions affect power balance: Employers facing the prospects of financial losses can be less flexible, but collective bargaining can bring leverage when services or operations are under the threat of disruption.
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External pressures complicate timelines: Rapid inflation fluctuation can be difficult to manage, but so can long periods of no change. In both scenarios, negotiators need to learn when to compromise and when to push for their request.
Stay steady with Scotwork
Managing inflation is difficult since both lower and higher interest rates can impact businesses, and in completely different ways. Whether you are a high-level executive seeking to future-proof your organisation or you are more junior and just wanting to protect your job and lifestyle, knowing how to negotiate can be key. Sharpening your skills and finding your preferred styles and strategies for negotiation will give you a playbook you can fall back on, no matter how those rates climb and fall.
This is where Scotwork can help. We might not be able to forecast when inflation will move again, but we can give you the negotiation skills you need to weather any storm, economic or not. Get in touch today to find out more about what our courses can offer you.
