Does the high inflation and increase in interest rates affect you and the way you run your business?

The most sensitive indicator of economic health for our wallets is inflation, which may be defined as an increase in the overall cost of goods and services. 

When people talk about an increase in inflation, what they really mean is that there has been an increase in the consumer price index. It is determined based on a specific framework of consumer expenditure on well-known goods and services.

Quarterly Economic Expert Survey among 1687 economists from 129 countries, conducted by the IFO Munich Institute for Economic research and the Institute of Swiss Economic Policy in Lucerne found that economists anticipate quite high inflation rates in the next few years with a possibility of global consumer prices rising by 9.5% by the end of 2022. During presentation of findings of this survey, on 17th October 2022, IFO analyst Dr. Niklas Potrafke said, that "Their inflation estimates for 2022 have again climbed dramatically - by 1.8 percentage points."

Inflation that suddenly spikes sharply is a particularly unpleasant experience. Simply put, if inflation is observed at the end of the year, this would imply that one would be able to purchase less products and services with the same amount of money compared to when inflation was not observed at the end of the year.

In Singapore, September 2022 inflation marked 7.5.% - the highest inflation rate since June 2008. 

According to Singapore MAS Monetary Policy Statement published on 14 October 2022, “MAS Core Inflation is likely to stay around 5% for the rest of 2022 and into early 2023. Overall, core inflation is expected to remain high in H1 2023 before slowing more discernibly in the second half as cost pressures gradually ease…For 2022 as a whole, MAS Core Inflation will average around 4% and CPI-All Items inflation around 6%.”

Further, MAS predicts that the global economy will suffer high inflation and slower growth in 2023 and Singapore's GDP growth will be below trend, and negative risks have increased. MAS Core Inflation is likely to stay elevated over the next few quarters, with upside risks being elevated.

The MAS has also determined that, on balance, a further tightening of monetary policy is required to guarantee that pricing pressures subside in the coming quarters.

How about interest rates?

As a unified front, during past few months central banks around the world have raised interest rates in an effort to tame inflation. 

In November 2022, the US Federal Reserve, implemented its fourth consecutive 75-basis -point rate hike. This action was likely taken to combat the global inflation crisis, which is largely result of rising costs of energy, clogged supply chains and Russia-Ukraine conflict. 

As a result of rising interest rates, the cost of borrowing money and the cost of loan products like mortgages, car loans, and credit cards will go up as interest rates change.

The idea behind is that people will cut back on their spending if it becomes more costly or difficult for them to obtain credit or maintain a  balance on a credit card. Consequently, with a cut in spending, demand drops, and commodity costs should go down.

The world bank group foresees the trend to continue well into 2023 and investors expect central banks to raise global monetary-policy rates to almost 4 percent through 2023—an increase of more than 2 percentage points over their 2021 average, according to the study conducted by World Bank Group .

The effects of inflation and rising interest rates in Singapore have increased in parallel with those in the United States and even through the most of pandemic-related restriction have been lifted, a significant number of local Singaporeans and business experience pressure of rising prices of common goods and services.

How does this affect ordinary people?

Interest rate growth

Since the beginning of 2022, private financial institutions in Singapore have increased their interest rates, following the lead of Federal Reserve . Consequently, the interest on loans - consumer loans, mortgages and those that business takes for development also have risen.

The population in such a situation, as a rule, postpones consumption, which means that demand generally decreases as consumers now look to preserve their savings.

Decrease in real income

Imagine that you got a 3% salary increase (or 1.03 times) effective from January 2022.

With inflation growth of say 6% for the same year, real income will be equal to 97.17%. This means that despite a salary increase, your income fell by 2.83% in real terms.

How about impact on businesses?

Some of consequences of high inflation together with hiking borrowing rates that businesses in Singapore may experience:

Rising costs of inventory, supplies and business operations

Impacts include supply chain instability, longer lead times and delayed orders, capacity blockage, and price increases for transportation, raw materials, commodities, and wages. All of this results in an overall increase in costs of inventory, supplies and overall business operations.

Increased borrowing costs

It becomes more expensive for firms to take out loans for working capital and investments when interest rates are raised. However, when inflation "eats" away at the value of money, interest payments on outstanding loans become cheaper.

Expansion Challenges

Increased borrowing rates, restrictions on the capacity to make investments, and the dangers associated with foreign currency exchange rates fluctuation,  all contribute to the expansion difficulties businesses face during periods of high inflation.

Change in customer behaviour

With the rise of interest rates and inflation it is expected that consumers tend to be attracted to save money and switch to cheaper alternatives. The ultimate impact economic forces that affect consumer to spend more or less of their available income.

Is it possible to stand up to inflation without resourcing to extreme measures? 

There are several ways to business owners can meet the new business reality:

Update financial planning and analytics processes and cash flow projections 

This aspect includes planning for a range of potential impacts and reviewing the allocation of the firm’s budget with a focus on agility and changing business environment.

Planning of cash flows is crucial to avoiding financial distress like missing payroll, defaulting on debt or going bankrupt or into receivership. A 13-week cash flow forecast is a short-term planning tool frequently used during liquidity shortfalls and in turnaround situations and allows for tight control over cash flows. This short-term forecast implies weekly cash planning by forecasting cash receipts and disbursement.

Mitigate risks

The key to mitigating internal risks is flexibility that businesses can have in their product manufacturing and services they provide.

For manufacturing, it is important to be able to diversify manufacturing geographically and have several sources of supplies of raw material.   Although the thinking of supply chain has shifted from just in time to just in case, the total procurement cost must be taken into consideration.  For example, unit price, quality, logistics, storage cost and etc.

Another way can be to transfer risks to outside entities, for instance, to counterparties and/or insurance companies.

Review the business operations/processes and improve productivity

Based on LEAN Manufacturing concept, use technologies and apps that track and improve productivity.

Engage consultants to review the current processes to optimise the productivity and quality

Review pricing regularly

Raise prices slowly, in modest increments and remain strategic. The added cost of goods due to increases of costs should pass on to consumers in the form of higher prices or more expensive services.

Review the spending and reduce expenses when and where possible

Check if company is making payments for services and/or products that are not being efficiently used and stop using these services or look for alternative which will generate savings in long-term.

Another way is to look deeper at costs : identify those which contributing the most of change and cut costs which are non-essential to the productivity of a business.

Be ready for new customers

Inflation creates new market segments which can become a new source of income for businesses. Further, customers behaviour becomes affected they are expected to be looking for a better value for money, better experience and customer services.

Inflation and growing lending rates can be handled in numerous ways. We hope this briefing helped you to understand the challenges and provided some answers for your own situation.

Perun Consultants is a boutique consultancy firm helping clients to review their business operations, assess the troubled areas and find effective solutions applicable to their specific businesses. Perun Consultants also provide professional advice in the matters of uncertainty of going concern operations and insolvency matters.