The word “inflation” is nothing new, but it’s been tossed around even more frequently in recent months. In the last few years, you’re sure to have heard it at least once or twice, and you may find yourself wondering: “What is inflation?” In this blog post, we’ll walk you through the entire concept.
To understand how inflation affects hospitality and food service businesses, it’s important to understand the fundamentals of inflation. Read on to gain a better understanding of inflation, what causes inflation, and why you need to know more about the effects of inflation.
What Is Causing Inflation?
When something intense happens in business or in life, one of the best ways to get ahead of it is to understand the reasoning behind it. That logic applies to inflation, too. If you can look at a situation of inflation and see the reasoning, you’re that much more able to deal with it efficiently.
Overall, there are three main causes of inflation. These causes apply in different ways to every industry affected by inflation. Some are planned for well in advance as part of a business plan and some can be worked around. Others are just something that needs to be pushed through when it occurs.
3. Demand-Pull Inflation
Demand-pull inflation is when the demand for products and services outweighs the supply of those products and services. This is the most common cause of inflation. It’s a type of inflation that is almost always present on some level, but it can be managed with demand planning.
2. Cost-Push Inflation
Cost-push inflation is when the prices of different goods and services increase in relation to an increase in wages and supply costs. This is often seen in grocery stores and restaurants, where the cost of goods–in relation to the cost of goods sold formula–is leading companies and resellers to raise their prices.
1. Built-In Inflation
Built-in inflation is the need for wages to increase when the cost of living increases. The reason behind it is to maintain the standard of living for everyone affected by higher costs. Built-in inflation is commonly expected based on regularly occurring inflation.
What Is Economic Inflation?
When you hear the terms inflation and economic inflation next to each other, you might think there is a difference. Luckily for anyone who isn’t an economics expert, this isn’t the case.
Economic inflation is the overall effect of inflation on the economy. It sounds simple, and that’s because it is. Economic inflation includes all of the effects you see from inflation at the grocery store, on your mortgage, or at a restaurant.
There are three areas where most people experience the effects of economic inflation. We’ll dive into those now.
3. Housing Costs
Inflation in the housing market is due to the demand for housing when supplies are low. From the cost of homeownership to rent expenses, inflation can lead to increases that are difficult for many, and even unattainable for some.
2. Restaurants and Food Services
Restaurant and food service businesses feel the effects of economic inflation with inventory items, from cocktail ingredients to wholesale produce. Those items come up to a higher price point or end up being unavailable. This can lead to higher costs on types of menu items, all due to the food supply chain.
1. Grocery Stores
For average individuals, economic inflation is felt in the grocery store. Prices on both bulk items and niche market items rise with inflation. The high demand for these items, paired with low supplies, means a steep rise in prices.
"Key Takeaway: In the hospitality and food service industries, inflation takes on a specific meaning with food supply and every other inventory need."
What Is Hyper-Inflation?
Hyper-inflation is an extremely high rate of inflation that leaves financial and community concerns–such as panic over grocery availability and mass buying–in its wake. Hyper-inflation does the damage that general inflation does to an economy, only at a much faster pace. It can happen without enough warning, or it can be the result of lower inflation intensifying over time.
Hyper-inflation can be an untamable beast. However, you can prepare for it with many of the same methods you can use to work against regular inflation. We’ll take a look at three signs of an oncoming hyper-inflation, to give you the ability to prepare for it sufficiently.
3. Extreme Supply Shortages
Some level of supply shortages can be expected at all times, for food and beverage industries and, well, every industry. They aren’t always a problem, and often, supply shortages contribute to moderate inflation. When they reach extreme levels, with grocery shelves being empty of certain products for months at a time–as outlined in this Center for Strategic and International Studies article–that is when hyper-inflation approaches.
2. Rapid Debt Increases
In this case, when we say debt, we mean the national debt. When the country is in debt, one way the government works with it is to print more money. That action directly increases inflation, and when it all happens too quickly, hyper-inflation looms.
1. Rising Raw Material Costs
Rising costs of a few larger items often causes some moderate inflation. However, when raw material costs begin to rise at a rapid rate, that is when hyper-inflation becomes an issue. Raw materials are components in so many industries across the board, that rising costs with those materials means inflation on a cross-industry level.
Who Is Most Affected By Inflation?
This wouldn’t be a BinWise blog post if we didn’t take a close look at inflation in terms of food service and hospitality. To answer this question of who is most affected by inflation, we’ll take a look at these industries and specific roles within them.
These three job titles are by no means the only people who face inflation in their work. They are, however, the ones with the most power at work to make decisions related to inflation. From buying power to operational efficiency decisions, these people tackle inflation head-on.
3. Accounting Staff
The accounting staff, from the manager to data entry workers, have an up-close view of inflation’s effects on the business budget. The responsibility of the accounting staff lies in sharing information on how inflation is affecting the budget with the rest of the team.
2. General Manager
The general manager is someone who the accounting staff will share inflation information with. The general manager is usually the person with the most purchasing power in hospitality and restaurant management. They may report directly to the business owner, or all business growth decisions may be entirely up to them.
1. Inventory Manager
The inventory manager has a close view of inflation effects from the physical contact with inventory items. While the accounting staff can see the numbers within the budget, the inventory manager can see the direct correlation between inflation and inventory needs through order management.
Frequently Asked Questions About Inflation
The word inflation is often scary. It brings a heap of financial, business, and future concerns along with it. But it isn’t something you need to fear if you have the right tools.
Of course, you can’t prevent inflation from happening at all, but with relevant information and plans, you can prepare for and counteract it. Our answers to these frequently asked questions will help you prepare.
Who Benefits From Inflation?
Equity and commodity investors stand to benefit the most from inflation. This is because equities and commodities are two things that always have some level of value, even during inflation.
For some background, an equity investor is someone who purchases shares of a company with the expectation of capital gains. A commodity investor is someone who invests in raw materials and primary agricultural products.
During periods of inflation, equity and commodity investors stand to come out ahead because they've invested in areas that are vital during inflation.
Why Is Inflation So High In 2022?
Ultimately, inflation is so high in 2022 because of the COVID-19 pandemic and all the supply and demand issues the pandemic contributed to. Since the beginning of the COVID-19 pandemic, commonly used items, from toilet paper to agricultural products, have become scarce due to high demand.
In addition, the U.S. government has worked to combat the COVID-19 pandemic with an increase in currency in circulation. According to the Federal Reserve, more currency was printed in 2021 and 2022 so far than in any year since 2018.
How Do People Survive High Inflation?
People can survive high inflation by being savvy shoppers, finding deals, finding replacements, and building whatever nest egg they can manage. Overall, high inflation is the time when individual consumers and businesses need to buckle down on saving and finding the most cost-effective methods.
How Can Inflation Be Stopped?
Stopping inflation is a tricky business. It can be managed through cost control and the governmental decision to slow the flow of money into the economy. Inflation is caused, in part, by a weakening of the power of currency because of too much money in circulation. Even when inflation has come from different reasons, slowing the flow of money in circulation helps.
What Is Inflation? Time to Deflate
When you’re armed with knowledge and a plan to move forward, even a term like inflation is something you can work through. In the hospitality and food service industries, inflation takes on a specific meaning with food supply and every other inventory need. Inflation and your inventory program needs go hand in hand.
Come back to the BinWise blog for inventory software support and further information about inflation in the industry. Visit our sister site, the BlueCart blog, for order management software support and wholesale distribution information. Check out the Revolution blog, another BinWise partner, for restaurant equipment breakdowns and solutions for restaurant operating expenses.