Prices on the Rise

In this blog piece, our director, John Bell, gives us an insight into the rate of inflation that we are currently experiencing and opinions surrounding what is driving inflation throughout the Irish economy in recent times.

What is Driving Inflation?

Inflation has been on the rise since the pandemic began. With varying opinions on the potential duration of the current inflation surge, it is crucial to understand the causes and prepare. Inflation can dramatically reduce profits and harm companies.
Let us start by looking at current signs of inflation, and then we will discuss what companies can do to prepare for such inflation.

Potential Causes of Inflation

Supply & Demand

One of the primary causes of recent inflation is supply and demand mismatches.
This is largely due to staffing shortages and assumptions made in specific industries. As a result, low supply and high demand have caused prices to rise significantly.

For instance, in the timber industry, early on during the pandemic, most sawmills expected a significant decrease in demand for their products. However, it was the opposite that ended up being a reality. As a result of people being at home more often than usual, many started renovation projects. Once demand increased, the lumber mills quickly ramped up production and eventually got to the point where supply was higher than the demand, which caused prices to start coming back down. Although they have come down from the peak prices, they are still greater than pre-pandemic prices.

One cause for the flip in supply and demand in this instance was demand decreasing as a result of the high prices that individuals and businesses were paying for products. This suggests that as inflation increases, demand will go down, which will in turn, hopefully cause prices to start to reduce and inflation rates to stagnate and eventually decrease.

Another industry witnessing similar price increases is the car industry. This is largely due to the chip shortage that has received significant media coverage worldwide. This has caused car prices to soar. This chip shortage together with new charges for importing from the UK post-Brexit has driven the price of new and second-hand cars to unheard of levels of inflation within the sector.

Staff Shortages

Another potential cause for the recent inflation the country is currently experiencing is the labour market.
During the pandemic, unemployment increased significantly as many employees were furloughed or even terminated from their job.
Some individuals even made the decision to leave the workforce, with the same money available on unemployment as they were receiving for their employment.

This has created an intensely challenging market for employers, and even forced many companies to raise the level wages to retain employees and hire new staff where needed.
These wage increases are typically passed on to the consumer, causing an increase in prices.

These increased wages meant that consumers had more money to spend on goods.
As many consumers feel that prices will continue to rise, they are purchasing goods now to prevent paying a further increased cost, which has caused further supply issues.

Supply Chain

The pandemic has caused several supply chain and logistical challenges for the country. The previously mentioned supply and demand and staff shortages have also reduced the number of drivers available to transport these goods throughout Europe and across the continent.
These issues, on top of manufacturing lockdowns in China and the Ever-Given vessel blocking one of the worlds busiest distribution paths in the Suez Canal, was followed by an explosion in demand. This increased level of demand has driven the cost of container freight to all-time highs with some industries reporting a 2000% increase on transporting the same goods to Ireland against pre-Covid times.

Both issues have resulted in shortages on the shelves in several different industries. Like any shortage, this led to increased prices, as stores can charge the consumer more for the few items they have on hand.
Many fear that these supply chain bottlenecks are not yet at their worst and may intensify further, which could cause inflation to no longer be transitory.

How to Prepare for Ongoing Inflation

Review Pricing

Most companies evaluate their standard costs and overhead rates annually.
In times of high inflation, it may be best not to wait for year-end to assess these costs. Instead, we recommend assessing them throughout the year which will help avoid significant year-end adjustments and better reflect the current cost environment.
This will also help in justifying potential price increases to consumers throughout the year.

Improve Technology & Automation

In some industries, the pandemic has seen an acceleration in embracing technology to a level that was never anticipated before.
Opportunities to automate should be welcomed where-ever possible and is a common practice to not only save on costs but also pull-back on diminishing profit margins.

Invest in Yourself

By far the best investment you can make to be prepared for an uncertain financial future is an investment in yourself. Particularly in skills or expertise that will increase your future earning power. Over 80% of Icon Accounting clients have used iPerks to some extent, with many of those choosing to upskill and cross-skill wherever possible.
The contracting market is currently witnessing massive growth and with iPerks Learning giving clients access to over 4500 courses, there really is no time like the present to take advantage of the resource and future-proof your earning power.

These recommendations may not make be applicable to every situation or every industry, it is essential to make informed decisions with a professional.
If you would like to find out more about iPerks or organise a demonstration, please reach out to the team by emailing iperks@iconaccounting.ie or get in touch with our team of advisors by calling 01-8077106. Alternatively, you can find out more on iPerks here.