How Does Inflation Affect a New Business: The Causes

The current inflation crisis has a number of roots that have combined together to drive up costs. The first part of answering the question “how does inflation affect a new business” is understanding why it’s happening in the first place. Here are the main culprits for the sudden increasing costs:

Supply Chain Disruption

The global economy is a relatively free system with the global supply chain moving raw materials through several stages around the world until they end up as a final product.

An example might be copper being mined in central Africa, being sent to Australia for processing into refined wire, which is used to make a PC motherboard in China that’s finally sold in Minnesota.

Each company along the way has its lead-in times and ordering processes, but Covid-19 caused production and shipping in many countries to be drastically reduced. This created a domino effect on supply chains, reducing output at every level. It then meant that to get the same product needed to fulfill sales, companies had to pay more than their competitor, raising prices and passing the increasing cost onto consumers.

Lower Production

As well as goods simply not being able to reach their markets or manufacturers not being able to get the materials they require, there was also the fact that many factories shut down or greatly reduced production to cope with worker safety legislation. This meant that the normal amount of goods weren’t being produced, with companies running down stockpiles instead. When these ran out, prices rose in line with excess demand.

Too Much Money Chasing Too Few Goods

Another impact of Covid was that people had little to spend their money on — no eating out, watching live events or trips to Vegas. This built-up cash over lockdown burst like a dam when restrictions were lifted, with people wanting to spend the money they’d saved. Unfortunately, there wasn’t the stock or the basic capacity (think employees and business readiness) to cope with demand, leading to people being forced to outbid each other to get the goods and services they wanted.

Price Shocks

The knock-on effects of Covid-19 had already been tightening global supply, but the world might have gotten away with a soft landing before Vladimir Putin invaded Ukraine. This had a major impact on many core global inputs, with Russia being one of the biggest suppliers of oil in the world, Ukraine and Russia supplying ¼ of the world’s wheat, and Russia and Belarus supplying 40% of the world’s potash (a key fertilizer ingredient). Added to the uncertainty caused by such a large war in Europe, prices shot up as companies sought to secure their supplies.