How Inflation Affects Your Business

Why it cannot be ignored


Chances are, you haven’t been giving much thought — or any thought — to inflation lately. Those white-hot increases in the cost of living throughout the 70s, 80s and early 90s are largely a memory now. With inflation idling around 2 percent for the last several years, odds are there are other, more important economic considerations in your business life.

Besides, inflation rates are an abstract concept to many security professionals — just a lot of numbers. In truth, inflation, whatever the current rate, plays a vital role in everyone’s life, business owners as well as individuals.

Consider the price of gasoline, which averaged about $1.35 per gallon 20 years ago; however, due to the unforgiving effects of inflation, a gallon of that same gas cost about $3.50 today. If you have been around long enough to remember when McDonalds dished up their 15-cent hamburgers in 1955, you may feel nostalgic when you shell out a buck for that same treat today (and a hamburger in some restaurants today will cost you $9 or $10).

 

The Complex Effects of Inflation 
One of the complexities of inflation is that its effects are misleading. It makes direct price comparisons — from one year or one era to another — meaningless. It makes some of today’s products seem expensive when they are actually cheaper and vice-versa.

The only meaningful way to compare prices from one period to another is to compare them with the general price level of each period or to the percent of average wages necessary to pay for the item during each period.

Money itself takes on a flexible value when inflation rears its ugly head. We have all heard that computer guru Bill Gates is the richest person in America, with a net worth reportedly at $76 billion. But he is a long way from being the richest American ever when you compare his fortune’s purchasing power with some of the great industrialists of a century ago. While the fortunes of John D. Rockefeller and J.P. Morgan were far less than $76 billion expressed in dollars of their day, their purchasing power was greatly in excess of Bill Gates’s today. That’s because a product or service that costs $1 today sold for about five cents a hundred years ago. Put another way, if you paid $1 for a product in 1903 and bought the exact same product today, it would cost you $23.34.

 

Direct Comparisons Can Be Misleading
During the Great Depression, a first-run movie ticket in a neighborhood theater sold for 15 cents — how does that compare with the tab at one of today’s multiplexes? With inflation factored in, a movie ticket should cost $1.90 today. Obviously, with ticket prices now running at $12 or higher, it is costing us a lot more to visit the local movie emporium than it did back in the dark days of the Depression (and don’t forget today’s $2.50 Coke that used to cost a nickel).

Of course, the bargain-price phenomenon evident in such areas as the price of hamburgers and gasoline doesn’t necessarily extend itself throughout the universe of products and services involved in the security business. Any security dealer paying for medical services or health insurance today is well aware that those costs have risen at a pace far in excess of inflation.

So what does all this have to do with your business? Plenty — misleading comparisons of prices can lead not only to a healthy dose of nostalgia, but faulty business decisions as well. Being aware of the true increase in costs after inflation is a necessary part of good financial management.

 

Inflation Never Lets Up
The rate of inflation can vary wildly from one year to the next; however, regardless of the variations, inflation continues its work relentlessly year after year. And, of course, each year’s increase compounds on top of the previous year’s. Even that harmless-seeming two percent or so inflation rate of recent years takes a significant toll over time. 

After ten years of two-percent inflation, that dollar bill in your pocket today would be worth only 82 cents.

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