Until six months ago, the specter of high inflation was a thing of the past. The world, especially developed nations, were dealing with the opposite problem, persistently low inflation (graph below shows historical US inflation).
Now, the current crisis sparked by the spread of the Covid-19 virus has raised again fears of a return of inflation.
Does this make sense? And, what should you do if prices rise again?
Covid-19 Sends Public Debt Sky-High
Governments around the world have responded to the shutdown of their economies with huge fiscal stimulus. While this is sound in the current situation, such expansionary fiscal policy adds a ton of debt to already high national debt levels.
Italy’s debt to GDP is going to reach 160%, but record debt will be the case also for France, the United Kingdom, and the United States, which are likely to pass their post World War II record of 106%.
What does this have to do with inflation? Because, if governments cannot borrow money due to excessive debt, the most likely policy they are going to implement to stimulate their economies is to print money. Printing money, at some point, generates higher prices for goods and services.
How To Deal With Inflation
If inflation returns, the value of your money will rapidly decrease over time, depending on how fast prices rise. A 10% annual inflation means that you will need USD 110 to buy the same product that you would have bought for USD 100 the year before.
If you are dealing in international trade, there are a few things that you can do to defend your business from inflation:
- If you are a seller, shorten your credit cycle. Try to get paid as soon as you can, because the value of your credit will decrease over time. Use cash in advance, anticipatory credits, revolving credits, anything that will make you have cash available, the sooner the better.
- If you are a buyer, settle the transaction immediately: the more you wait, the higher the price of the same product could be in the future. If you are negotiating credit with your bank, do it long term: rising revenues due to inflation will make it easier to pay down your debt in the future.
- If you have to keep money in cash, put it in short-term treasuries or in inflation protected treasuries, so that you will not loose much of your purchasing power.
- In any case, use a reliable currency such as the US dollar, the Euro, the Japanese Yen, or the Swiss Franc.
Not Every Business Is A Loser
Inflation does not hit all businesses in the same way. If you are an exporter of commodities, such as agricultural products, oil and gas or mineral resources, inflation could probably be the best thing that ever happens to you. In fact, your revenue will rise just because of the effects of inflation.
Other winners will be businesses that do not need a lot of fixed capital to operate, such as technology firms. In fact, automating your manufacturing company and implementing technology to reduce energy consumption or manpower could potentially help you in a high-inflation future.
Globartis Research
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