Inflation—the rise in the general prices of goods and services—can happen for various reasons.
For one, businesses may find it fitting to increase their markups when there is an increase in demand or a limited supply of goods and services. A low unemployment rate can increase consumer spending and cause scarcity in the availability of goods, resulting in “demand-pull inflation.” In this scenario, people have more money to spend and buy more things. The increased demand can lead to higher prices.
Most people think of the worst when they hear “inflation.” For the record, inflation can be mild or severe. A manageable inflation rate is 2%, while a 3% to 10% inflation rate can potentially cause economic losses.
Inflation can have positive and negative effects on businesses and consumers worldwide. For enterprises, the impact will generally depend on factors such as inflation level and predictability, the nature of business, and the economy’s state.
Read on to learn the effects of inflation on the packaging industry and other sectors.
Positive Effects of Inflation
Inflation can present promising opportunities to business organizations and even individual consumers.
Higher demand for goods
When inflation occurs, consumers generally spend more money on products than they did before amid the decreased value of their money. Consumers typically want to buy sooner to avoid further price increases. This increase in spending can create a higher demand for goods, which benefits businesses as the volume of goods sold also rises.
Inflation increases profits because it justifies price hikes for manufacturers and other businesses to continue producing goods and offering services. The general price increase can also help your business sell more items per unit, charge more per item, and maintain reasonable profit margins.
Regardless of your industry, you must spend on materials, equipment, and labor for daily business operations. As inflation increases operational costs, you could pass part of those costs to consumers through price increases. Despite higher prices, consumers continue to buy essential goods and services.
This scenario pushes more money from sales into your company.
Business expansion opportunities
As prices go up and create short-term demand among consumers, you could leverage the opportunity to produce and sell more. You might need to hire more workers, making it possible to expand your operations so you can continue addressing the increased demand.
Negative Effects of Inflation
Obviously, inflation can pose challenges through increased costs and other limitations.
The most harmful effect of inflation is it forces your company to increase prices for business profitability. Otherwise, you might not have adequate financial resources to cover daily operational costs. The decision to hike prices is particularly challenging when there is high inflation, as it means you have to keep up with rising costs and increased business competition.
Inability to invest in innovations
During inflation, you may be less likely to invest in new technologies or tools to allocate finances to more urgent needs, including hiring, training, or reskilling employees. It may be practical to wait until prices come down before venturing into new investments to make more profit on them down the line.
4 Ways Inflation Affects Packaging Businesses
High economic inflation can immensely impact the packaging industry and businesses that depend on it. Here are some of the most notable effects of inflation inside and outside the packaging sector.
- Higher production or material cost
As raw packaging materials—like paper, cardboard, and plastics increase in cost—your production expenses will naturally be more expensive, too. With the price increase in these materials, the cost of final packaging also rises. Ultimately, you will need to charge more for your finished product.
This scenario could mean consumers will be less likely to buy these products, leading to decreased sales for your business. Customers might want to wait until the prices drop. With fewer customers willing to make purchases, the demand goes down. You may then have to reduce your inventory and offer your products with a lower price tag to avoid wastage.
Then again, higher material costs could also mean that you will have a more challenging time competing with other brands because you cannot set lower prices than what they offer.
- Logistics price hike
Logistical requirements like transportation costs are essential across businesses.
When transportation costs increase, getting products from manufacturing facilities to retail locations is more expensive. As such, customers have to pay more for food, clothing, and household items to account for such costs.
Alternatively, many companies try to find ways of cutting back on shipping expenses to reduce their prices. One way they do this is by reducing their packaging size or weight so they can fit more items in a single shipment. When this happens, the packaging company must modify or review its products or processes to cater to the client’s cost-saving measures.
So, whether you belong to the manufacturing or packaging industry, you must transport goods from one place to another. As a result, you incur higher transportation costs and have no recourse but to implement a price increase.
- Higher subcontractor pricing
When subcontractors increase their prices, the packaging industry is also on the receiving end of price adjustments. When subcontracts decide to hike prices for their services, this may lead to higher prices throughout the supply chain and higher costs for consumers, both of which can negatively affect producers and consumers alike.
First, you will have to bear the additional cost of the subcontractor’s increased price, which can be difficult if you’re already operating on tight margins due to inflation.
Second, if you are primarily dependent on subcontractors, it can be challenging to find alternative suppliers if one supplier increases its prices beyond what you can afford. You must establish a relationship when looking for new suppliers to ensure they will deliver on their commitment to your business. Otherwise, your production might incur problems or delays for your customers.
- Erratic market demand
The packaging industry is one of the most essential in the business landscape. It’s responsible for designing, creating, and distributing various things people use daily. For example, the industry is responsible for food containers, medicine labels, and popular e-commerce items like clothing.
Again, inflation can cause consumers to advance or delay their purchases depending on their buying preferences or habits. This uncertainty means businesses that rely on steady supply chains, like grocery stores or pharmaceutical companies, can’t operate as efficiently as they should.
If manufacturers and suppliers can’t keep up with erratic market demand due to inflation, it’s bad news for everyone, including the packaging industry. When not enough goods need packaging, your client base will be small.
With companies unable to turn their products into sales, affected businesses can lose money on inventory sitting around unused. It goes without saying that not being able to sell one’s products makes it harder to stay afloat financially and increases the risk of going out of business.
The Impact of Inflation
Inflation is not an ideal situation for consumers and businesses, especially if you’re in the packaging industry. Price increases can affect most, if not all, your business-related processes, from production to shipment and sales. The key is formulating the right strategies to help you combat inflation with the most negligible losses for your business.